Employee Benefits and Expenses Real time collection of tax on benefits in kind and expenses through Voluntary Payrolling

Size: px

Start display at page:

Download "Employee Benefits and Expenses Real time collection of tax on benefits in kind and expenses through Voluntary Payrolling"

Moses Bailey
5 years ago
Views:

Employee Benefits and Expenses Real time collection of tax on benefits in kind and expenses through Voluntary Payrolling Response by the Chartered Institute of Taxation 1 Introduction and Summary 1.

1 Employee Benefits and Expenses Real time collection of tax on benefits in kind and expenses through Voluntary Payrolling Response by the Chartered Institute of Taxation 1 Introduction and Summary 1.1 The Chartered Institute of Taxation (CIOT) sets out below its response to proposals to introduce a framework for the voluntary payrolling of benefits-in-kind (BIKs) and taxable expenses payments. 1.2 We would welcome the introduction of a statutory framework for the voluntary payrolling of BIKs. We think that a voluntary payrolling framework represents a good first step towards simplifying the taxation of BIKs. 1.3 We also think that where BIKs are payrolled no P11D should be required by HMRC in respect of the payrolled BIKs. The employee will, of course, still require a clear statement of pay and BIKs to, for example, complete his/her tax return. 1.4 We agree that HMRC should produce a list of BIKs that can be payrolled but that employers should be able to pick and choose which BIKs the employer will payroll, although once selected the employer should payroll those BIKs for all employees (except in exceptional circumstances). 1.5 A key aspect will be clear guidance for employers on how to treat different benefitsin-kind and expenses payments for tax and NICs purposes, and how they are to be processed for payrolling purposes. 1.6 We also agree that employers that join the voluntary payrolling arrangement should start to payroll from the beginning of the tax year. Employers should also be able to withdraw from a payrolling arrangement but only from the start of the following tax year. 1.7 An option to account for Class 1A NICs monthly may help some employers and we agree that it should be included as part of the framework. Further consideration

2 should be given to whether the P11D(b) process might be dispensed with for those agreeing to account for Class 1A on a monthly basis. In many respects such Class 1A would be akin to Class 1 employer s NIC on cash and so if reported via RTI would that not be sufficient? 1.8 Where an error arises in the amount of a BIK payrolled we would expect it to be corrected in year through the normal payroll run, by amending the cumulative totals and correcting the tax liability. Where this cannot be done an end of year true up will be required. Depending on the circumstances the resulting over- or under-deduction of tax may be repaid to or recovered from the employer or employee. Depending on the circumstances this might involve an in-year adjustment, an Earlier Year Update type approach, reconciliation via a P800 or ironing out via the Self Assessment (SA) process. 1.9 There are many circumstances where an incorrect figure may be inadvertently payrolled, eg a change in company car or a private use payment etc. As noted above, clear guidance will be required on what do if an error is discovered. We suggest that HMRC continues to work with payrolling employers to build up a set of scenarios of the difficulties that may be encountered and a best practice course of action for resolving them. We also think that if the employer has used reasonable endeavours to get things right then they should not be penalised. Worries about undue penalties could dissuade employers from wanting to move to voluntary payrolling. 2 Detailed Comments General 2.1 It has long been the case that employers have had informal arrangements with HMRC to payroll some or all BIKs (as acknowledged at paragraph 3.1 of the consultation document). The introduction of a formal framework putting such arrangements on a statutory footing is therefore to be welcomed. Equally, the decision to proceed with a voluntary rather than a mandatory payrolling framework is to be commended. 2.2 The OTS recommended that P11Ds should not be required to be filed for BIKs that are payrolled (paragraph 2.14 of the consultative document). Current HMRC practice is to require the statutory submission of a P11D with a note that the BIK has been payrolled (paragraph 3.2 of the consultation document), although we understand that HMRC may have agreed other informal practices with some employers which do not involve the requirement for a P11D. That said, paragraph 3.2 of the consultative document notes that on occasion there has been miscommunication which has inadvertently led to BIKs being taxed twice. We think that to avoid such a scenario happening again, where BIKs are payrolled they should not be required to be returned to HMRC on a P11D. At the very least there should be a tick box to indicate which BIKs have been payrolled. 2.3 However, we do think that it will be important for the employee to receive a clear statement of pay and benefits received to show pay, payrolled BIKs and nonpayrolled BIKs. This could take the form of an expanded P60. The statement could also indicate where it has not been possible under the PAYE system to deduct the full amount of income tax due (for example, because of the overriding limit on tax deductions). This would help to make it clear to the employee where they stand in terms of what tax has been paid on what benefits and also what benefits they should P/tech/subsfinal/ET/2014 2

3 report if and when preparing a tax return (or in understanding a P800 subsequently sent to them by HMRC). 2.4 Furthermore we agree with the comment at paragraph 4.8 of the consultation document that payrolling will clearly not get everything exactly right first time and so we think that some sort of truing up needs to be factored into the system. And if any correction is required then (depending on the circumstances) this might be by way of in-year adjustment, an Earlier Year Update type approach, via the P800 or possibly via SA. We think this is entirely manageable but will need some further thought to keep things as simple as possible. Response to consultation questions 2.5 Q1 Do respondents agree that a voluntary payrolling framework presents the best overall opportunity for simplification? 2.6 Yes. Giving employers the opportunity to payroll BIKs voluntarily and providing the methodology for doing this provides the best opportunity for simplification. Also, the move away from the previous discussions on a mandatory system of payrolling is welcome. As has been noted in response to previous consultations, compulsory payrolling has the potential to significantly increase employer burdens, especially for smaller employers. 2.7 We do, however, accept that voluntary payrolling has the potential for being confusing for employees, especially where the employee has multiple employments or moves from a payrolling employer to a non-payrolling one (or vice versa). The requirement for clear communications between employers, employees and HMRC should be an essential part of the payrolling framework. We think the abiding message should be to keep things as simple as possible. 2.8 Q2 Should employers have to payroll all BIKs endorsed by HMRC, or choose freely from a list of approved BIKS produced by HMRC to suit their business? 2.9 We agree that it is not practical to payroll all BIKs. Some BIKs cannot be determined in advance because of the rules for calculating or agreeing the value of the BIK (eg utility bills in job-related accommodation where the BIK is limited to 10% of annual pay, or beneficial loans where the interest rate fluctuates). Therefore, it is right that a list of BIKs that can be payrolled is developed While we can understand why the Government might want a standardised approach so that all BIKs on a prescribed list must be payrolled we do not think that this is the right approach. Employers will want to pick and choose which BIKs they payroll depending on internal reporting systems, some BIKs may be easier to payroll than others We would therefore recommend that to encourage employers to adopt payrolling, employers should be able to freely pick and choose which BIKs, from an approved list, to payroll Q3 Should payrolling apply to all employees within a PAYE scheme subject to a limited number of exceptions and special cases, and what should these exceptions be? 2.13 We think that if an employer opts into payrolling then generally speaking the employer should have to payroll BIKs for all employees included within any given PAYE scheme. We do however accept that there may be exceptions to this rule as outlined in paragraph 4.13 of the consultation document. If for any reason an P/tech/subsfinal/ET/2014 3

4 employer wanted to operate a second PAYE scheme where payrolling did not apply then we believe they should be free to do so (see paragraph 4.13 of the consultation document) Q4 What might cause an employer to need to cease payrolling? Would employers prefer payrolling arrangements to be irrevocable once entered into, or for HMRC to develop terms of withdrawal which accommodate the necessary protection? 2.15 We think that employers should be able to opt out of a payrolling arrangement. We would suggest that, as the Government recommends, this should be at the beginning of the tax year. HMRC will therefore need to develop appropriate terms for withdrawing from a payrolling arrangement. In this regard, however, we cannot see why HMRC would need up to 6 months notice to get employees tax codes correct. Given the advent of RTI we would anticipate a much speedier turnaround. Why would 6 months be needed? 2.16 We also agree that to keep things simple employers entering into a payrolling arrangement should only be able to start payrolling from the beginning of the tax year Q5 Would respondents welcome the option to account for Class 1A NICs in real time where the BIKs are being payrolled? 2.18 We think it would be helpful to offer employers the option of accounting for Class 1A NICs during the year. This should not, however, be compulsory If employers pay monthly will an end of year P11D(b) still be required? We think not and, coupled with no requirement for a P11D, we think this could be a significant carrot to encourage employers to enter into voluntary payrolling. We would see inyear Class 1A NIC on benefits as akin to monthly, weekly, etc employer Class 1 NIC on cash. As Class 1 NIC is these days reported via RTI then similarly we would see in-year Class 1A also being dealt with in this way. Indeed this could herald future thinking about what to do with Class 1A NIC, and indeed whether it is necessary to retain it all Q6 For employers experienced in payrolling, what are the most common reasons for errors in the amount of tax deducted, and what actions are commonly taken to address this, in particular after the payroll has closed? 2.21 Generally, it is the late reporting of information that gives rise to errors in the amounts payrolled. For example, a change in company car or medical insurance premium, or a payment for private use, etc is not notified to the payroll department until after the payroll has closed for the month (see paragraph 6.1 of the consultation document). In most cases a correction can be made the following month Where the error is not discovered until after the tax year ends, some form of year end true up is required. This may involve, for example, the submission of an Earlier Year Update (EYU) to HMRC correcting previously reported figures. As noted above we believe some form of truing up will be needed for the new voluntary payrolling protocol Q6A Where tax is under-deducted should the existing approach for PAYE be adopted with recourse to the employer using existing principles? 2.24 As noted above, in most cases the employer will correct an error within the tax year. In this situation the employer would apply the corrected cumulative figures and any P/tech/subsfinal/ET/2014 4

5 extra tax deduction arising would be a matter between the employer and employee to resolve. A similar approach should apply under voluntary payrolling In terms of voluntary payrolling then where an error is discovered after month 12 has closed, and it is not possible to run a supplementary payroll to address the problem, we do not think it would be right to have recourse to the employer in circumstances where their approach has been a reasonable one and there has simply been an inadvertent error, particularly given that the mistake might arise from an action or omission of the employee. In some cases, if there has been an underpayment, the employer will be able to pay the tax by way of an Earlier Year Update type approach and thence recover it from the employee. In other cases this may not be possible and we suggest the correct approach would be to collect the amount due from the employee via his/her PAYE tax code or a SA return. This would have to be looked at on a case-by-case basis Payrolling will be a voluntary arrangement between the employer and HMRC as the employer is under no duty to payroll and could simply opt to continue to complete P11Ds and leave it to HMRC to collect the right amount of tax on BIKs via the PAYE code. Therefore, to encourage employers to opt in to payrolling, we think HMRC should adopt a light touch and only have recourse to employers for under-deductions in extreme cases Similarly, if a mistake is discovered after the end of the tax year and an overpayment arises, an employer could again submit, for example, an Earlier Year Update, with the lower BIK figures (and then correct the statement of pay and BIKs given to the employee). However, what then happens to the over-deduction of tax? Who will HMRC repay it to, the employer or the employee? In these circumstances it may be easier to reimburse to the employee given that ultimately he or she is the one out of pocket Whether an over- or under-deduction arises, there needs to be clear communication from the employer to the employee why this has occurred and what will happen Q6B What other exceptions exist where new PAYE rules may be required, for example, where HMRC issue a tax code to be operated on a week 1 / month 1 basis? 2.30 We are unclear what HMRC means here. The operation of a Month 1 tax code does not change the amount of tax collected that month on BIKs, whether payrolled or included in the tax code. Also, a Month 1 tax code is illustrative that a year-end reconciliation (P800 or Self Assessment) is likely to be required, which will be a matter between HMRC and the employee, and not the employer Q7 The Government is interested to hear from employers experienced in payrolling on dealing with the issues covered at paragraphs What are employers experiences of this, and do the options described provide workable alternatives? 2.32 As noted above and in the consultation document, practical issues arise around end of year, sudden fluctuations in benefits and internationally mobile employees It would, for example, be right to carve out internationally mobile employees with modified payrolls, eg Appendix 6 cases, where BIKs are estimated and payrolled and there is a true up on the tax return Also, where payrolling BIKs would result in a significant percentage of cash pay being taken as tax, we would agree that an overriding limit should apply (paragraph P/tech/subsfinal/ET/2014 5

6 6.5 of the consultation document). We would suggest adopting the 50% overriding limit in Regulation 2 of the Income Tax (PAYE) Regulations Where it is not possible to collect the full amount in the tax year we think it would be helpful for employers to flag this up to employees, so that they are aware that an under-deduction arises from the operation of PAYE and not through any mistake on the employer s part Similarly, where the employee has nil or reduced pay (eg because he/she is off sick and not/no longer entitled to SSP) it may not be possible to collect the correct amount of tax on BIKs (paragraph 6.3 of the consultation document). This would be the same if BIKs were included in the tax code. In such cases, we think it should be flagged with the employee that the PAYE system has not been able to collect the correct amount of tax and the employee will need to true-up his/her tax liability with HMRC after the end of the tax year. This will either be via a P800 or via SA Additionally, where an employee moves from a coded out BIK situation to a payrolled BIK situation (or vice versa), eg on a change of employment, we think this is no different to an employee moving between an employer that provides a BIK and one that does not. The key is communication: HMRC is notified of the employment change through RTI and should flag the tax code for review. Equally, the employee should be aware that his/her circumstances have changed and contact HMRC Q8 Company Cars and Fuel a) How do employers deal with any payments or contributions for private use made retrospectively, and particularly those made from 6 April to 6 July? b) Do employers continue to submit form P46(Car) to report charges? 2.39 The changes made to Sections 144 and 158 of ITEPA 2003 by Section 25 of the Finance Act 2014 apparently mean that payments for private use must now be made in the tax year. While HMRC may operate an administrative easement in exceptional circumstances we understand from HMRC that their intention is that private use contributions will have to be made before 6 April is this correct? In any event the CIOT raised concerns with HMRC about Section 25 and was disappointed that they were not taken on board; we had suggested that the making good date be 6 July, not 5 April. Up until now contributions would have been anticipated to be forthcoming over the period to 6 July if for any reason they were not paid then an adjustment would need to have been made. The approach going forward under voluntary payrolling will presumably also be a default that contributions will all have been made for private use before 6 April and if they aren t then an adjustment will be required. The issue now will be that many more adjustments may be required because administratively 5 April is too early to properly judge what is due The P46(Car) is no longer mandatory and our understanding is that not that many employers continue to use the form. We would suggest that, to avoid any confusion, payrolling employers should not submit the form Q9 PMI (or gym membership fees) paid on behalf of the employee a) Where the policy renewal period falls part way through the tax year unless the premium for the year is agreed in advance, what value is payrolled? Do employers project a value based on a previous year premium, or estimate the premium and begin payrolling on that basis and adjust once premium for that year is agreed? b) Do employers payroll the total annual premium in the month paid? 2.42 Generally, PMI (or similar) is typically provided while the employee is employed by the employer (albeit in some cases it may continue after an employment has ended P/tech/subsfinal/ET/2014 6

7 until the renewal date). In such circumstances we would expect the BIK to be apportioned across the insurance year, so that where the renewal falls part way through a tax year the old rate is used up to renewal and the new rate thereafter Q10 One off large BIKs in the form of the transfer of an asset (a property or valuable antique) These items with a large tax charge will require a significant deduction of tax in a single pay period. a) Do any employers payroll these items? If so, how are they dealt with? Do employers spread the value of these across the remainder of the year of do they payroll the total in on pay period, or b) Do employers report items on a P11D with a note that it is a one off? 2.44 Normally, where the value of an asset is uncertain the position is subject to negotiation and agreement with HMRC. As it is not possible to predict when the value will be agreed it would be appropriate to include the BIK on a P11D as a oneoff item rather than payrolling it What would be helpful is if the P11D included a tick box to indicate the asset transfer was a one-off. This approach has also been suggested by the OTS and we recommend that it is introduced. 3 The Chartered Institute of Taxation 3.1 The Chartered Institute of Taxation (CIOT) is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it taxpayers, their advisers and the authorities. The CIOT s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer. The CIOT draws on our members experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work. The CIOT s 17,000 members have the practising title of Chartered Tax Adviser and the designatory letters CTA, to represent the leading tax qualification. The Chartered Institute of Taxation 2 September 2014 P/tech/subsfinal/ET/2014 7

1 Executive Summary UK REPRESENTATIVE BODY ON THE CONFEDERATION FISCALE EUROPEENNE

1 Executive Summary UK REPRESENTATIVE BODY ON THE CONFEDERATION FISCALE EUROPEENNE Employee Benefits and Expenses Real time collection of tax on benefits in kind and expenses through Voluntary Payrolling HM Revenue & Customs (HMRC) consultation document Response from the Low Incomes