Tax reporting by employers

The end of the tax year on 5 April signalled the start of the tax reporting season for employers. In the period from 6 April to mid-July, employers have a series of payments to make and reporting deadlines to meet. Delays and inaccuracies, whether deliberate or simply out of ignorance, can result in financial sanctions. What follows is not an exhaustive list of everything that every employer needs to do, and so employers are encouraged to look at their Employer’s CD-Rom supplied by HM Revenue & Customs as well as use the HMRC website.

Reporting cash payments

Form P35, the employer’s summary of PAYE and NICs payments made during the year in respect of each employee, should have reached HRMC by 19 April. Late submission attracts a penalty of £50 per batch, or part-batch, of 50 employees, for every month or part month that it is delayed. So a delay of four weeks for a payroll of 98 employees can result in the same penalty (£100) as a delay of five weeks for 2 employees.

The details of payments to each employee are recorded over the tax year on form P11 (deductions working sheet) and summarised at the year end on a three-part document, form P14 (end of year summary). The top two copies of this form were due by 19 April. The third copy, form P60, should be given by 31 May to each employee who was working for you on 5 April. P14s are needed for those who left during the year, but their P60s can be destroyed as the relevant information was on the P45 forms they received on leaving. Detailed information about forms P11, P14, P35 and P60 may be found in the Revenue’s Employer Helpbook E10 ‘Finishing the Tax Year up to 5 April 2008’.

In the unusual situation of a termination payment to a former employee or director having an estimated value of at least £30,000 and including a non-cash element, an employer has until 6 July after the tax year to report the details of the package. The same deadline applies for any later year in which the package is varied.

Taxable benefits in kind and expenses

Although there are some employment perks that an employer can provide without the employee suffering tax on them, the general rule is that employers should complete a P11D form for every employee who receives expenses payments in cash (even for business expenses) and for every employee who receives any taxable benefits in kind, as long as that employee’s remuneration would be £8,500 or more for a full year. This safeguards against employers paying additional salary and simply saying that it was ‘expenses’ and so not taxable.

However, so that no tax is paid on genuine business costs, the employee can make a claim for tax relief on the grounds that the expenses were either ‘incurred wholly, exclusively and necessarily in the performance of the duties of the employment’ or ‘are attributable to the employee’s necessary attendance at any place in the performance of the duties of the employment’. Form P37 is used if the employee does not complete a self-assessment tax return.

In order to short-circuit the use of two forms that, combined, result in no tax being paid, HMRC will grant employers a dispensation from showing expenses on P11D forms. To get a dispensation the employer needs to satisfy the Revenue that it only pays out genuine business expenses and that it adequately monitors and controls this. Use form P11DX to apply for 2008/09 (it is now too late for tax year 2007/08).

Besides expenses, the most common items to appear on P11Ds are private medical insurance and company cars, but the benefit of a loan of £5,000 or more that is ‘cheap’ (interest of less than 6.25% pa) or interest-free should also be shown, as should the cost of most journeys to and from work that the employer meets. The Revenue has recently clarified its rules on late-night taxis home for employees and the guidance at www.hmrc.gov.uk/manuals/ eimmanual/EIM21831.htm is recommended reading for those employers concerned. Further details on travel expenses are in booklet 490. For employees whose annual remuneration is less than £8,500, only a limited range of benefits need to be reported, and these are listed on form P9D.

Forms P11D together with an accompanying employer’s return on form P11D(b) need to be delivered to HMRC by 6 July (note that this is a Saturday this year). They can be submitted online, but you must register with HMRC in advance. The form P11D(b) provides a calculation of the employer’s Class 1A national insurance contribution, which must be paid by 19 July (or 22 July if paid electronically). Penalty notices for late payment or late submission of returns can be slow in coming and so are costly reminders. A diary note is better! If submitting electronically, it is essential to receive a receipt message.

Employer-provided tax- and NIC-free benefits: some examples

• The best-publicised employment benefits are child-care vouchers with a face value of up to £55 per week.
• Car parking at or near work, whether provided on the employer’s own premises or by the employer reimbursing the employee or providing a permit, is also on the list.
• Employer-provided training that can be related to the skills or attributes needed at work does not constitute a taxable benefit, but if the employee funds his or her own training, no tax relief will be given – even if it is the same course! The solution could be for employees to enter into a salary sacrifice agreement with the employer, whereby they agree in advance to give up sufficient gross salary to fund their employer’s provision of the training.
• Mileage payments for employees driving their own cars on the employer’s business do not need to be shown on P11D forms, even if no dispensation is held, as long as the payment is no more than 40p per mile for the first 10,000 miles in the tax year and 25p per mile for any additional miles.
• If the employer makes it clear that any ‘company’ van that is taken home by an employee must not be used for any other private journeys and this rule is adhered to, then, unlike ‘company’ cars, the employee does not suffer a tax charge on the benefit of travelling between home and work in the van.
• Medical check-ups and eye tests for VDU users are not regarded as taxable.
• A single employer-provided mobile phone and the provision of a laptop and/or PDA for business use are not regarded as taxable benefits.
• A uniform that carries a conspicuous logo on each piece is not a taxable benefit in kind, but ordinary clothing, however smart, is generally regarded as a benefit in kind.
• Trivial benefits to employees, such as flowers or a small Christmas gift – but not vouchers or cash – are also free of tax and NICs.

PAYE settlement agreements (PSAs)

Employees usually pay the tax charge on benefits shown on their P11D forms, but there may be occasions when it is more appropriate for the employer to foot the bill. Using a PSA avoids the benefit appearing on the P11D form. The agreement needs to be made with HMRC by 6 July after the tax year, but the process should be started as soon as possible as correspondence may be needed. Because the employer meets the tax on a grossed-up basis, together with a NICs charge, it is not a cheap option.