On 6 April 2016 we welcomed in a new tax year and with it some new rules intended to simplify the benefits in kind (BIK) regime. The tax cost of these new rules is minimal to the Treasury, but the main objective is to cut the administrative costs of reporting for both businesses and the Treasury. The key areas of change are:
Voluntary payrolling of BIK
Employers are now able to tax certain benefits through the payroll. By doing so, this will remove the requirement to report the benefits on a P11D form. Employers can choose which benefits they would like to payroll, with the exception of vouchers, living accommodation and loans which are not covered by this new regime. This could potentially negate the requirement to complete P11D forms for a number of employers.
For the 2016/17 tax year employers must have registered to use this service by 5 April 2016 and their payroll software must have the capability to collect the correct amount of tax. HMRC’s ‘Basic PAYE Tools’ software is not suitable for this.
During the recent Budget, the Chancellor announced that from 2017/18 it will also be possible to voluntary payroll non-cash vouchers.
Trivial exemption
Under a new statutory exemption, if an employer provides a benefit to its employees, the benefit is exempt from tax as employment income providing all of the following conditions are satisfied:
- the cost does not exceed £50;
- it is not cash or cash vouchers (high street vouchers are ok);
- the employee is not contractually entitled to the benefit; and
- the benefit is not provided in recognition of their employment duties.
There are no restrictions on the number of trivial benefits which can be provided in one year for employees, however for directors of close companies the total value of benefits which can be treated as exempt trivial benefits are capped at the annual exempt amount of £300. If the employer is a close company employing members of the office holder’s family, they too are subject to the annual cap of £300.
Abolition of dispensations
Previously an employer had been able to request a dispensation from reporting certain benefits and expenses to HMRC. Dispensations became obsolete with effect from 6 April 2016 with new legislation introduced to cover the payment of business related expenses.
Nearly all expenses and BIK previously covered by a dispensation will now be automatically exempt and will not need to be reported to HMRC nor included on a P11D. In some cases approved HMRC scale rates can be used for reimbursing employee expenses rather than the actual costs incurred. These rates will still apply under the new exemption. If, however, you would like to apply a bespoke scale rate, agreement will need to be obtained from HMRC.
Whilst this potentially removes a large proportion of the reporting requirement, employers should continue to maintain detailed records of expenses and benefits.
Removal of £8,500 threshold for taxation of BIK
Those employees who earn at a rate of less than £8,500 per annum have historically been exempt from tax on certain BIKs. From 6 April 2016 this no longer applies and all employees will now be subject to tax on BIK, where applicable, irrespective of their level of income. However, new measures will mitigate against some of this for lower paid ministers of religion and home care workers.
The P9D form has now been scrapped and any benefits will need to be reported on the P11D unless they are dealt with under voluntary payrolling.
The correct treatment of BIK can be a complex area. The above changes do not exempt employers from reporting any and all BIK; the onus is still on the employer to ensure the correct treatment is applied.