Real Time Collection of Tax on Benefits from 2016

Transcription

1 Real Time Collection of Tax on Benefits from 2016 Executive Summary The previous Government spending reviews paved the way for full-blown consultations into all areas of PAYE modernisation, and when combined with the recent work of the OTS (Office of Tax Simplification) into reducing the burden of P11Ds, changes to the way benefits and expenses are reported was inevitable. This paper seeks to clarify what is actually taking place in relation to payrolling of benefits, and also explains how the P11D Organiser fits in with HMRC s newly announced requirements. There have been many column inches written about reducing the number of P11Ds and the way benefits will be reported, but firm implementation plans are only now beginning to be shared. It should not be forgotten that the P11D return is an essential part of the process of reporting the financial burden that benefits in kind offer to both employees and employers. The range and variety of these benefits is the reason that benefits and expenses didn t get rolled in to the RTI implementation a few years back they are complex in their nature, and in many cases vary on a month by month basis, making real time reporting especially challenging, as the benefits are largely managed outside a core payroll system. Employers should not be lulled into a false sense of security by relying on their existing solution suppliers to be able to meet these new requirements. Payroll suppliers are still completing on some of the modifications related to RTI (Real Time Information) for PAYE, and have previously shown limited interest in devoting any real resource to their P11D or benefit reporting software. Equally many dedicated P11D software packages have been designed as simple form-fillers and as such will not easily be able to be upgraded to offer payrolling of benefits integration. PAS Ltd is the UK market leader in benefits & expenses software and our P11D Organiser software suite remains the software of choice in the corporate sector, and is also the chosen solution for our many payroll partners when it comes to reporting benefits and completing P11Ds. The P11D Organiser already has a proven solution for payrolling all benefit types - this is incorporated into our payroll module add-on to the software which has been used extensively in the Republic of Ireland for a number of years. Friday, 28 August 2015 Page 1 of 6

2 Reporting Benefits and Expenses from 2016 Current Position Since 1996 employers have had to calculate cash equivalents of the benefits that they provide to their staff. This was a requirement introduced with the advent of Self-Assessment so that employees who were in receipt of a tax return could fill them in accordingly. Cash equivalent means the cash value on which employee will pay tax according to the type of benefit they have been provided by their employer. There are currently fourteen areas of the form P11D, which are governed by various rules to derive the cash equivalent that is to be reported in each section. The basic cash equivalent formula is: Cost to the Employer of providing the benefit (inc VAT) Less Amount made good by the employee (Out of their net pay) Equals the Cash Equivalent Employers are then required to submit end-of-year forms P9D, P11D and P11D(b) to HMRC by 6th July each year. Employees need to be issued with copy P11D information detailing the amount of the cash equivalent of each benefit and the corresponding self-assessment tax return box number displayed adjacent to this figure. Most employers have opted to provide employees with Benefits Statements in lieu of facsimile P11Ds, largely because the P11D is designed for HMRC purposes, so is not the ideal for transparent employee communication. A Benefits Statement can be designed to offer more information to the employee about how the cash equivalents of benefits have been calculated, and can be personalised with the employee s home address, employer s company logo and accompanying text explaining who they can contact in case any of the details are incorrect. As P11Ds are currently submitted on an annual basis, employees tax codes do not reflect the benefits of which they are currently in receipt, and often run a year behind. Real Time Collection of tax on Benefits-in-Kind and Expenses through Voluntary Payrolling HMRC has now published draft regulations detailing what can (and can t) be payrolled in the future. Initially the plans indicated that only four benefits types would be involved (cars, car fuel, PMI and subscriptions), however the regulations now show that the payrolling framework has been extended to support all BiKs EXCEPT beneficial loans, accommodation and credit vouchers. HMRC has published a few other details about how the payrolling framework will work: There will be a Payroll Registration Service which organisations will access via the internet where they opt in to payrolling certain benefit types. Employers can select which benefit types they want to payroll it is worth noting that opting in covers the COMPLETE benefit type (i.e. PMI), and EVERYTHING in that type has to be payrolled, not just one element. Friday, 28 August 2015 Page 2 of 6

3 Organisations can select for certain employees to be excluded from payrolling, but this is an employee by employee process on the HMRC web site. Opting in to payrolling a benefit will automatically remove it from the employee s tax code, and flag them to ensure there is no accidental reinstatement. Opting in this is for the whole tax year you can only opt out if you were to stop offering the benefit completely. Once enrolled in the service, it means that the obligation to report that particular benefit on a P11D is removed (obviously if there are other non-payrolled benefits in play then a P11D is still required for the employee to report those benefits). This also means that the P11D(b) will be decoupled from the P11D submission previously all of the benefits reported on a P11D had to tally with the totals on the P11D(b). There are still open discussions about some of the finer details of how this will work and how the final checks and balances will take place. Advantages of Reporting Benefits-in-kind in Real Time Information As far as both the employee and the employer are concerned, these changes can bring some welcome improvements: As employees will pay the correct tax at the right time there will be far fewer underpayments of tax arising. There will be more protection for the Employer. A more accurate benefits information flow will mean better compliance as any mistakes arising can be spotted and rectified earlier. There will no longer be a requirement to complete end-of-year benefits forms dependent on the benefits that are payrolled. However, having to report benefits in real time will place a far greater responsibility on Payroll Departments to get information early and perform calculations on the fly rather than producing a retrospective end of year report. Calculating Cash Equivalents Periodically Payrolling some benefits can be relatively straightforward for instance, you can take the annual premium of a health scheme and divide it by 12 to generate monthly payments, however even a simple benefit such as this can be complicated by in year variations and changes, as they are often managed outside of the payroll system. Administration of multiple benefit types with different revision points in the year plus higher frequency deductions (eg weekly or fortnightly payrolls) will make determining a periodic cash equivalent for payrolling even more difficult to manage - even for simple benefit types. However, once you embark on payrolling more complex benefits the in-year variations will make real time updates of the benefit value far more complex. There are some very complicated rules to calculate the cash equivalents for certain benefits such as company cars and car fuel. In many of these complex formulae, various data points are required to be collated before the cash equivalent calculation can be made e.g. the amount of company car tax an employee will pay is dependent on just some of the following data points: Friday, 28 August 2015 Page 3 of 6

4 List Price of the vehicle Cost of accessories when car first made available Cost of accessories added after car first made available CO 2 emissions figure Fuel Type Period of availability Capital Contributions made by the employee towards the acquisition of the vehicle Any private use contributions deducted from the employee To complicate matters further no one department holds all of this information when Real Time Information for benefits are selected it will become the Payroll Department s responsibility to formulate a methodology to co-ordinate the workflow for benefits information. The calculations related to car and fuel assignment are not easy, and for that reason are likely to be handled by external systems. These will require a closed-loop connection to be put in place with the payroll system to allow pay variations to be incorporated accurately and efficiently. Communicating with Employees Payrolling of benefits will have an effect on an employee s monthly salary, and may even vary it on a monthly basis, therefore decisions need to be made about how this information will be communicated. Thus far, HMRC has not made it a mandatory requirement for an employee s payslip to detail these elements, and even if they did, this may be just a summary line for ALL payrolled benefits - a short narrative on a payslip can give little more than an indication of the financial implications, and a monthly statement may be more appropriate but a start of year plan and an end of year summary will also be essential. Employees will understandably wish to enquire how the figures shown as Notional Pay appearing on their payslips have been calculated, and you should have the ability to generate a Notional Pay statement explaining exactly how the figures have been calculated. Notional Pay statements will not normally be required to be issued at every pay period. Instead, a Notional Pay statement would only be required any time an employee s benefits provisioning changes, and the resulting notional pay details reported to payroll fluctuates. Friday, 28 August 2015 Page 4 of 6

5 Best Practice Methodology Benefits Information Collation The Payroll Department must be in a position to be able to quickly gather the relevant data points from each department holding benefits information. Best practice would be to make each department responsible for the accuracy of their provided data. The necessary steps include: Devising a template for the relevant benefits data points to be sent to each department responsible for different benefits data. Utilisation of a software solution that is capable of quickly validating the provided data from each department and also capable of returning any invalid data to the data originator to correct at source. Calculation of Notional Pay The software solution must then be capable of calculating the updated annual cash equivalent values across all applicable benefit types. This will then need to be apportioned into the amount of benefit that should have been payrolled to date. This figure is then compared to what has previously been put through the payroll and the difference is reportable as that period s notional pay. This methodology ensures: Real-time changes in Benefits-in-Kind values result in positive or negative adjustments to the remaining Notional Pay figures for the year. Employees are guaranteed to pay the right amount of tax on their benefits. The resulting notional pay feeds will then have to be fed into the payroll system for the tax to be deducted. Friday, 28 August 2015 Page 5 of 6

6 How PAS Ltd can help PAS Ltd is the UK market leader in benefits and expenses software. Our P11D Organiser solutions is the software of choice in the corporate sector. We have many prestigious clients such as Royal Bank of Scotland, Aviva, ITV, Amec, Morrisons and Network Rail etc. The P11D Organiser is also the chosen solution for our payroll partners. e.g. MidlandHR, Ceridian, Pegasus and Iris. We were invited to join HMRC s Stakeholder panel on Payrolling Benefits in summer 2008 and undertook joint trials on payrolling benefits with the Chartered Institute of Payroll Professionals since We have also maintained communication with HMRC about the upcoming legislation and involved in working groups related to the new framework. We have a proven working solution to payroll all benefit types which is incorporated into our payroll module add-on to the P11D Organiser. The payroll module was originally developed as a bespoke project for a major UK based employer to tax benefits provided to their staff based in the Republic of Ireland. The payroll module can split annual cash equivalents across all benefit types into periodic Notional Pay feeds for payroll. Real-time changes to benefits result in positive or negative adjustments to the remaining Notional Pay feeds for the year. This guarantees that your employees will pay the correct amount of tax at the right time. Notional Pay statements can be ed to employees explaining how their Notional pay has been calculated. Furthermore, as we offer seamless integration with payroll systems, there is no need to replace your existing payroll system. Illustration of how our solution works Benefit Statements Payrolling Module Government Gateway Periodic Notional Pay Statement Employee Payroll Benefit Values on Payslip HMRC Friday, 28 August 2015 Page 6 of 6