Stuart Crook FCA, explains how gifts and benefits to staff can potentially lead to a tax charge.
You reward your employees for all their hard work with a gift, and then the next thing you know you're being taxed for it!!!
Unfortunately for business owners, this is the challenge of grasping the regulations surrounding benefits-in-kind. Benefits that employees or directors receive that aren't part of their salary are also referred to as 'notional pay', 'fringe benefits', or 'perks'. They're potentially seen by the taxman as a means of raising the wages of your employees
Some benefits get taxed, while others don't, and it can be difficult to decipher which rules & regulations apply to your circumstances. To make things a little easier for you, we've put together this blog. By reading it you'll be better equipped to make sense of what a benefit-in-kind is, how to report it, and when to pay it.
A benefit-in-kind (BIK) occurs where services, or assets, are purchased by an employer for their employees to consume. Staff are deemed to have received BIK when the receipt of these perks benefit them personally, and there isn't a clear, identifiable, business purpose.
BIK can take a variety of different forms and tend to be taxed to ensure employers don't replace salary with gifts. That said, some aren't taxed, however, if you're providing them then it's wise to tally their value as cash equivalents.
Examples of BIK include:
Free or subsidised meals
Private medical insurance
Discounted schemes, services, or products
Fees for training
Professional subscriptions and fees
Devices such as laptops and phones
Where benefits are taxed, this is applied to both the employees personal tax and their National Insurance (NI). It is also applied to your employer’s NI contributions, usually Class 1A NI contributions on most of the benefits. You may also need to pay tax on them too.
This means it's the responsibility of you, as the employer, to record expenses and benefits so that they can be reported to HMRC. Be sure therefore to weigh the benefits, and tax consequences, carefully before implementing anything for your staff.
Examples of taxable benefits-in-kind
Here is a list of some of the most frequent types of BIK that are likely to incur a tax charge:
A vehicle purchased for your business
Private medical insurance
Employee-provided assets with considerable personal usage, such as living accommodation
Self-assessment fees paid by the business
Loans to employees
Non-business travel costs
Expenses for non-business entertainment
Benefits that can be exempt from taxation
There are a few benefits that are exempt from taxation. However, there are complex rules for each form of these benefits, and a variety of conditions that HMRC will consider before determining if there is a tax liability due. This means you should probably discuss this with an accountant to understand if a tax charge is likely to be incurred.
Here are some examples where tax may not be due:
Meals are offered to all employees in the staff canteen however, the cost of the meal has to be deemed reasonable
Certain travel expenses, such as a work bus
An employee that has paid for a business cost with a company credit card, so long as they aren't making a personal purchase
Contracts for mobiles phones between your organisation and the network provider
Payments to an approved pension scheme
It is ultimately for HMRC to decide whether to levy a tax charge depending on your circumstances.
How to report benefits - the process
Benefits-in-kind have to be tallied up at the end of the financial year. They are then added to your employee's income. As mentioned earlier, the contributions are also paid by the employer at a rate of 13.8% of the calculated value of the benefit in kind.
Benefit-in-kind can be documented or taxed in 2 different ways, either through submission of a P11D form, or by paying tax on the benefits through the payroll.
You will need to record all of the benefits and expenses you provide, plus maintain a system for authenticating them. This means keeping all receipts, dating them, and filling out all expense forms. You then have to keep these for 3 years from the end of the tax year in which they took place.
1. Submission of the P11D form
A P11D is a tax form you use to document the expenses and employment benefits received by your employees and directors during the year. As an employer, you must submit a form for each employee in receipt of benefits.
When you submit one or more P11D forms to HMRC, you'll also need to send them a P11D(b) form. This is so that they can assess the amount you need to pay in Class 1A NI on the benefits and expenses you’ve provided to your employees.
P11D forms need to be submitted by the 6th of July after the end of the relevant tax year.
Not all benefits need to be included in the P11D form, an example being workplace pension contributions. Your accountant will be well placed to advise on such matters.
2. Paying tax on benefits through your payroll:
The other alternative is to deduct and pay the tax on your employees benefits. For this to work, you need to register with HMRC prior to the start of the tax year, 6 April. This bypasses the time consuming need of filling out and submitting the P11D form. However, you will still need to submit the P11D(b).
You need to check that the benefits you offer can work through your payroll. if not, the either you can operate both systems, some benefits through payroll and others through P11D, or you submit everything in the P11D.
Exemptions when completing P11D
There are some routine employee expenses that you don't need to inform HMRC about. These include phone bills and entertainment expenses. For this to apply you have to pay a flat rate to your employee as part of their income or reimburse your employee’s actual costs.
Trivial benefits in kind aren't included. A benefit is trivial if it is considered small, or a token gift, given by management to employees. They are usually gestures such as bottles of wine, chocolates, beer, or team lunches. The specific rules around them are that they:
Aren't performance related
Aren't part of the employment contract
Cost less than £50
Aren't part of salary sacrifice
Aren't a cash equivalent
Aren't a salary sacrifice
Important deadlines you need to know
Online submission of P11D form
Following the end of the tax year
Employee copy of information
Submission of P11D(b)
Payment of Class 1A National Insurance
(expenses and benefits)
Payment of tax and National Insurance
(owed under a PAYE settlement agreement)
Payment of any PAYE tax or Class 1 National Insurance
(owed on expenses or benefits)
The importance of your payroll and maintaining records
Record keeping in this instance is absolutely essential. An HMRC investigation of your business could result in them requesting to check your records. This means you'd have to be able to demonstrate that you've reported all BIK accurately and that all of the information on your end-of-year forms is valid. You have to keep track of the following:
The date and the description of each benefit you've offered
Any payments your employees have contributed towards benefits
Evidence of the amounts shown on your year-end forms
Any correspondence between you and HMRC
Whilst records should be retained for 3 years, employers frequently keep this data for 6 years because some payroll data is treated the same as accounting records.
The content of this post was created on 03/05/2023 and updated on 09/05/2023. Please be aware that information provided by this blog is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather than relying on the content supplied by the author(s) of this blog.