The best-known way of informing HM Revenue & Customs of the benefits and expenses provided to your company’s employees and directors is to complete a P11D form for each employee, and to submit these forms to the tax authorities within three months of the end of the tax year.
However, HMRC now allow you to collect tax on benefits and expenses through your payroll instead. Doing this is sometimes known as ‘payrolling’. If you wish to do this, you need to register online with HMRC before the start of any tax year for which you want to do this.
The basic premise behind payrolling is that the cash equivalent of any benefit or perk provided to an employee is added to their salary and then this benefit or perk is taxed via the payroll. Broadly speaking, the ‘cash equivalent’ amount is the cost to you, as the employer, of providing the benefit (inclusive of VAT); less any amount made good by the employee. However, there are some very complex additional rules surrounding calculation of cash equivalents, especially for benefits such as company cars.
Payrolling can be used for all benefits save for employer provided living accommodation and interest free or low interest loans.
If you wish, you can decide to restrict use of payrolling to certain benefits and/or certain employees, and carry on using P11Ds for your other benefits and employees.
Once you have decided to use payrolling, you need to inform all affected employees in writing. You also need to provide them with the following information before June 1 each year:
- Details of which benefits were payrolled in the tax year just ended
- The cash equivalent of each benefit that was payrolled
- Details of any benefits that were not payrolled
If you decide to use payrolling, you still need to submit form P11D(b) to HMRC at the end of the tax year to give details of NI contributions due on the expenses and benefits you’ve provided to your employees and directors.
You should also note that you can’t reverse a decision to use payrolling, at least until the start of the next tax year. Once you’ve opted to use this method, you’ll have to carry on doing so for the remainder of the tax year, unless you stop providing the benefits in question prior to this. Once you have notified HMRC that you are using payrolling, you can carry on doing so until such time as you decide to deregister, so there is no need to make a separate notification for each tax year.
You’ll need to make sure that your company payroll systems can cope with collecting tax on benefits and expenses via the payroll. If you’re not sure about this, then you may need to consider outsourcing payroll to a specialist third party company.
For an informal chat about P11ds and outsourcing, give our team a call on 0333 358 3414.