In 2014, the Office of Tax Simplification (OTS) published its report ‘Review of employee benefits and expenses: second report‘ that recommended several simplifications to reduce employer burdens when it came to P11D processing. One such recommendation was to allow employers to voluntarily put taxable benefits through the payroll from the 2016/17 tax year. Simply, this is the real time collection of tax on benefits-in-kind through the payroll system – known as payrolling benefits.
Things have progressed in 2015 and this is where we are now:
Legislation will be passed later in the year to allow for this and will amend the Income Tax (Earnings and Pensions) Act 2003 (ITEPA). It will not change the definition of a benefit or the fundamental way that it is calculated, however, will require employers to register as an ‘authorised employer’. Once registered, an authorised employer will have the legislative support to payroll benefits except:
- beneficial loans, and
- credit tokens and vouchers
Registering as an authorised employer
This is the announcement that came through on 12 October 2015. The new terminology in ITEPA simply means an employer who has registered to payroll benefits and one that HMRC have accepted. Registration is done via the payrolling tool PBIKs, accessed via the Government Gateway. Note that even if you are payrolling benefits already, you must use the PBIKs service to become an authorised employer.
To be authorised, an employer has to use the PBIKs tool before the start of the tax year for the relevant PAYE scheme:
- The employer will identify the benefits that will be payrolled according to the section where they are declared on the P11D. The tool will assume that this is for employees in employment at the start of the tax year. PBIKs will identify the employee on HMRC’s systems and will remove the value of the benefit from the employee’s tax code
- Where some benefits have been declared at section M ‘Other’ on the P11D, the employer will need to consider these carefully. The payrolling declaration on PBIKs is an ‘all or nothing’ approach and it will not be possible for some items at Section M to be removed and others to remain on the P11D declaration
- PBIKs will also ask if any employees are not to be payrolled, i.e. excluded from payrolling. The employer can exclude the employee by specifying the National Insurance Number or by entering the name, date of birth and current gender of the employee
- The tool is not designed to exclude employees mid-tax year
- New employees in the tax year will automatically be payrolled on the benefit if the employer selected to payroll that benefit for all others employees. A new employee cannot be excluded from payrolling until the start of the next tax year
- An employer can choose to cease to be an authorised employer but only from the start of the following tax year or if the benefit is no longer being provided
- Payrolling does not do away with the obligation to complete the P11D(b) for Class 1A NICs
It is really important employers who are already payrolling benefits use PBIKs to become an authorised employer. If they do not, strictly, the act of payrolling will be illegal. Further, the announcement says that employers should register to become authorised by 21 December 2015 to prevent benefits being included in the annual 2016/17 coding run. It is possible to register after this date, however, employers should be aware that they may receive multiple tax codes for some employees.
I think that many employers will welcome the opportunity to payroll benefits from 2016/17. This will mean that the obligation for annual P11D processing is removed and replaced by processing each pay period instead.
However, there are a lot of unanswered questions about how this will actually work in practice, for example:
- Where are the specifications to allow payrolling to be facilitated in software? To me, this is fundamental to the success of payrolling as, if software cannot facilitate it, the employer cannot do it. Reference is made to this in the announcement that says ‘You’ll need to align your payroll software and register to payroll using the new service by 5 April 2016′
- Guidance on how to payroll benefits is promised after the publication of the Regulations, though shouldn’t we have this information now? When someone works every week of the year and has a benefit that is constant, payrolling should not be difficult to do. However, what happens when someone goes onto a period of unpaid leave or even a period of leave where pay is reduced (maternity, sickness etc)?
- Where are the results of the payrolling pilot that HMRC have been undertaking? It would be interesting to have this information so that we can judge whether or not systems are actually robust enough to handle payrolling
Please, please do not use the PBIKs tool without consulting your software developer or payroll provider first.