With all the different types of costs involved in running a business, it can be hard to determine if the costs your employees have are taxable or non taxable.
As an employer providing business or private expenses for your employees, you have certain tax, National Insurance and reporting obligations.
There are separate rules for individual benefits you provide to your employees. You need to follow specific reporting and payment rules for different items, including travel, meals and accommodation.
Therefore we thought we would provide a brief overview to try and help you understand but more importantly…get it right
So what’s an expense and what’s a benefit?
Expenses are payments made by employees as a part of doing their job. For example; Your employee pays to stay in a hotel as they are visiting a client.
A benefit is something that is advantageous to employee. For example; Your employee has use of a company car you provided for private use.
But there are also items that are advantageous but fall under being ‘Non Taxable’. These include:
- Mobile phones supplied for business use, including personal calls
- Computer equipment supplied for business use
- Annual Party/s, up to £150 per head and per year. Just one thing to watch in this one guests are also included within the headcount but not the allowance.
- Health Screening; An employer can pay for 1 assessment and 1 screening per employee per year
- Eye Tests and Glasses for employees that use any visual equipment
- Mileage – Payments made inline with HMRC’s Approved Mileage Allowance. Bicycle’s are also included within this scheme. If you pay more than the AMA the excess becomes taxable.
From April 2016 HMRC introduced non taxable trivial Benefits in Kind. Which means each employee can receive a gift from their employer without it becoming taxable, although the below criteria applies:
- It costs £50 or less
- It must be for a celebration…i.e. birthday meal, Christmas present
- It doesn’t form part of a salary sacrifice scheme
- Its not provided as part of employment, i.e. a bonus for achieving a target
- Directors, Office holders, Employees who are part of a directors family or part of their household have an annual cap of £300
From 06/04/2016 HMRC also introduced items that are exempt from tax and NI deductions.
- These cover routine expenses incurred by employees whilst doing their job, as long as there is no financial gain
- They are classed as Qualifying subsistence costs, which include, Travel & Hotel, Car Hire, Home phone when phone used for business calls, company credit card, business entertainment
- You don’t have report these expenses to HMRC but you have to keep records
- Dispensations no longer apply
- Below is a list of the common taxable items
- Company Cars – If also provided for private use
- Company Van – If also provided for private use
- Fuel Cards – If provided with a car that’s also being used for private use
- Private medical insurance
- Personal bills – i.e. gym memberships
- Private use of company property i.e. City flat
- Rewards made to employees in relation to their employment i.e. shop vouchers, concert tickets
Please refer to HMRC’s Expenses and benefits: A to Z for further guidance on what it or isn’t taxable
If you supply an employee with a car you must submit a P46(car) form when you have provided, changed or withdrawn a car. This needs to be filed at the end of the quarter in which the change took place
Benefits through payroll (Payrolling)
From April 2016 you can register to payroll the value of your benefits through payroll, therefore eliminating the need to produce yearly P11d’s for your employees and it also means that the employee pays tax in real time.
- Loans, living accommodation or credit card vouchers can’t be included
- You need to register to be able to use this system and you need to do so before the tax year begins. Once registered HMRC will always assume that you will payroll your benefits unless you inform them otherwise
Record Keeping & Reporting
You must keep a record of all expenses and benefits you provide to your employees.
- Your records need to show that you’ve reported accurately and your end-of-year forms are correct.
- HMRC may ask to see evidence of how you accounted for each expense or benefit at the end of the tax year.
What you should keep a record of?
- the date and details of every expense or benefit you provide
- any information needed to work out the amounts you put on your end-of-year forms
- any payment your employee contributes to an expense or benefit
- You should also keep any correspondence you have with HMRC
- Records must be kept for 3 years from the end of the tax year they relate to
At the end of the tax year you’ll need to submit a P11D form to HM Revenue and Customs (HMRC) for each employee you’ve provided with taxable expenses or benefits.
You should also submit a P11D(b) form if:
- you’ve submitted any P11D forms
- you’ve paid employees’ expenses through your payroll
- you’ve been sent a P11D(b) form by HMRC
- Your P11D(b) tells HMRC how much Class 1A National Insurance you need to pay on all the expenses and benefits you’ve provided
If you don’t submit any P11D forms, you can tell HMRC that you don’t owe Class 1A National Insurance by completing a declaration.
If you’re ‘Payrolling’ benefits you’ll still need to submit a P11D(b) form, so you can pay any Class 1A National Insurance you owe. You may find submitting this electronically via HMRC easier, how to do this can be found on GOV.UK
Just one last thing to remember…..a Director is not exempt from these regulations; they are classed as an ‘employee’ for all expense and benefits matters!