Employers have to bite the bullet

As the self-assessment machine grinds into motion, it’s easy to get the impression that the new system only affects the self-employed and people who get tax returns. In fact, it is employers who will find themselves at the sharp end of many of the changes. Accountants in business, therefore, will need to keep on top of the new developments. Those in practice can expect to hear from their clients who are employers, particularly during the P11D completion season.

The changes that are going to affect companies are inextricably linked to the new-format tax returns due out shortly. Staff will have to provide a lot more detail and employers will be required to supply the information in the first instance. Returns must be complete – that is, contain all the information necessary to calculate the tax liability of that individual for that year – and on time. Old favourites like ‘to be advised’ or ‘per P11D’ will be unacceptable. Penalties will fall thick and fast for those who do not meet these requirements.

Penalties and fines

Obviously, if employees are not given the necessary information by their employers then the whole system will collapse. For this reason, some severe penalties have been lined up. Failure to provide an employee with a form P60 can cost up to u300 per form with a possible further daily penalty of up to u60 per form. Failure to submit the P11D on time to the Inland Revenue, or now to provide a copy to the employee, invites similar penalties. A maximum fine of u3,000 may be imposed for each incorrect or incomplete form P11D.

The Revenue is being coy about these penalties, especially where the issue is one of delay rather than error, stating that it will ‘remind the employer of the obligation’ and ‘encourage compliance’ as a first step. However, the penalties have not been introduced irrationally. Employers who are inclined to neglect such matters should remember Voltaire’s warning that in England ‘it is thought well to kill an admiral from time to time to encourage the others’.

Avoiding problems

So what should employers do about all this? In practice, most of the changes they are facing relate to P11D completion. To ensure problems are avoided, all employers should go through the following processes:

Make sure proper systems and agreements are in place during the year.

There are certain procedures that cannot be left to the year end. For example, the requirement to reimburse the cost of private calls on a mobile telephone or private fuel provided with a company car must be imposed in advance. If there is no requirement to make good these costs before they are incurred then the Revenue will not accept that a subsequent repayment by the employee can eliminate the tax charge.

It is easy to overlook some forms of benefits and expenses. Once more, the employer needs to have good systems in place during the year. In addition, however, many employers will find it useful to work through a checklist at the year end as an aide-memoire to benefits that might have been overlooked.

From this year, it is necessary for employers to know how to calculate the taxable value (‘cash equivalent’) of all benefits provided for their directors and staff. This is because it will no longer be sufficient to say that, for example, living accommodation was provided for a particular employee. It will now be necessary to calculate the taxable value and provide a figure to the employee. The basic principle for most benefits is that the taxable value is equal to the cost the employer incurs providing the benefit. Many of the most commonly provided benefits have their own special rules, however, including company cars, fuel provided with company cars, vans, beneficial loans, living accommodation and mobile telephones.

Employers should ensure they have at least one member of their organisation familiar with the detailed rules regarding any benefits provided. Pitfalls abound in the benefits legislation. Where necessary, specialist advice should be sought.

Demise of PRP

Benefits in kind are also moving into focus for another reason. The forthcoming demise of profit-related pay means many employers are starting to look around for new tax-efficient forms of remuneration. These cover a wide range from childcare facilities to sporting facilities, car parking at work to late-night transport home, from loans up to u5,000 to medical checkups for the employee and his or her family. As a successor to PRP, however, it is likely that there will be a renewed interest in the concept of staff suggestion schemes. As long as these are properly established, substantial tax-free payments may be made to staff to reward genuinely helpful suggestions about the business which employs them.

Employers are faced with a new, penalty-backed compliance burden in the detail of P11D completion, a tightening skills market as unemployment falls and the demise of PRP. Now may be the time to reappraise the role of benefits in kind and consider whether they should play a greater part in the package of employee remuneration.

Ray Chidell is a tax partner at Neville Russell and author of the P11D Handbook, a looseleaf manual published this week and available to Accountancy Age readers at #65 post-free (normal price #75) by calling Accountancy Books on 01908 248000 (please quote ref: PG5Q).