As I am sure you are all aware May, June and July are three important months in the PAYE and NIC reporting calendar. As such we thought that it would be useful to summarise some of the key issues to be aware of and the importance of getting it right first time!
We are re-scheduling our “Introduction to the New CIS” seminars for November 2006, at various locations. Further information will be sent in due course, but if you would like to register your interest now please e-mail your contact details to cis@adtax.co.uk.
As ever, if you would like any further information in any of these areas or any assistance in meeting your obligations then please do let us know.
The Inland Revenue, and particularly offices dealing with “large” employers (typically over 1000 employees), is moving towards what is referred to as a “risk based systems audit” for Employer Compliance reviews.
A risk based approach does exactly what it says on the tin. The Revenue look at all available information on a business and rate it as to the likely risk of non-compliance. In this way they can target Employer Compliance reviews at those businesses most likely to be non-compliant (or identify the technical areas where failures are likely to produce the greatest yield of income tax, NI, interest and penalties).
The good side of such a move is that if you, as a business, can reduce your assumed risk of non compliance from the Revenue's perspective then you can may be able to avoid or at least postpone any future Employer Compliance review.
Many businesses will be picked up for review because of their trade, size, or employee profile. You cannot easily influence such factors. You can however manage other factors, such as the quality and timeliness of your annual returns. The returns may be the only regular communication you have with the Inland Revenue and as such it is important to ensure they are accurate.
Why it is important
The form P11D is one of the key documents examined in any Employer Compliance review. The potential penalties associated with submission of incorrect forms are £3,000 per form (i.e. £6,000 in total including both the Revenue’s and the employee’s copies). It is important therefore to make accurate submissions.
Should you, following an Employer Compliance Review, choose to settle the tax on any previously unreported benefits, the Revenue will seek this on what is referred to as a “grossed up” basis. This is calculated in the same way as a PSA (see below) making such settlements very expensive, typically an 88% tax charge for higher rate employees, and 45% for basic rate employees.
This route is therefore best avoided.
The basics
The reporting deadline for submission of forms P11D and the accompanying form P11D(b) is 6 July. The due date for payment of Class 1A NIC is 19 July, or 21 July if you pay by an approved electronic method.
Subject to very few exceptions, any expenses or benefits provided to employees by reason of their employment which are not exempt by statute or by way of a form P11D dispensation must be reported on form P11D.
We recommend that to minimise your reporting burden, you regularly review and appropriately update your P11D dispensation.
The calculation of the various benefits reported on forms P11D varies significantly in complexity. If you would like any additional information on any specific items then please do give us a call.
Below are some of the common errors that tend to appear on forms P11D.
All benefits
Benefits are often reported excluding VAT based upon the recorded costs within the accounts.
Even if you are able to recover the VAT in full, for P11D reporting purposes the benefit provided must be inclusive of VAT.
Company cars
Common errors include:
The use of rounded or incorrect list prices.
Accessories and/or delivery costs excluded from the list price.
CO2 rates don’t match the vehicle.
Non-specific engine sizes.
Period of availability incorrectly calculated.
“Capital” and “private use” contributions incorrectly categorised.
It is the employer’s obligation to ensure that the information reported upon the P11D is accurate. If you have obtained information from a third party (perhaps a car lease provider) this is no defence should it be found to be incorrect.
It is very rare that a car’s list price or its engine size ends in a zero. The list price should include the cost of any delivery charges and any accessories added to the vehicle prior to purchase, or those costing more than £100 if added after delivery.
CO2 rates are very specific for each car. Two identical vehicles, one with a manual gearbox and the other with an automatic can have different CO2 rates.
The supply of private fuel for company cars is a very lucrative area of tax recovery for the Revenue. If you have supplied fuel for private purposes, no matter how little (even if it’s only a £1’s worth!), to a company car driver then a private fuel scale charge should be applied.
Where you have only provided fuel for business mileage but have done so at an excessive rate, then the excess “profit” should be subject to tax and NIC. This does not give rise to a Car Fuel Benefit. However it is important to ensure sufficient detail is recorded to be able to demonstrate the business element of such journeys. The Revenue publish advisory fuel rates which if used should ensure that no profit arises on either the payment of business mileage or recovery of private mileage costs for company car drivers.
Living accommodation
This is amongst the more complex of the reportable benefits. Even if the actual benefit is calculated correctly, there may be some associated costs to consider such as:
1.The value of any additional assets provided, usually where the accommodation is actually owned by the employer, such as a cooker, fridge, bed and TV.
2.Council tax, water rates, electricity and gas, if paid or reimbursed by the employer, can give rise to additional taxable benefits with potential further problems regarding the distinction between Class 1 and Class 1A NI.
It is expected that most employers will provide their employees with some sort of taxable benefit no matter how small, at some point within the year.
Most of the benefits will be reportable upon forms P11D which will enable the recovery of the tax and NI due. However it is also expected that other benefits, where it would be inequitable for the employee to bear the resulting tax charge, will also be provided. This may include such items as:
a trip to the local pub for a “business lunch”;
the reimbursement of the mileage costs an employee incurs in going to the office to deal with an alarm call; or
accommodation costs where an employee stays at or near his permanent workplace having worked late to meet that last minute deadline.
If you provide your employees with taxable benefits which fulfil the PSA criteria of being minor, irregular or impractical to apply PAYE to, and you as an employer wish to pay the income tax on behalf of your employees then you need to apply for a PSA by the 6th of July following the end of the tax year.
All items included are settled on a “grossed up” basis such that £1 of benefit gives rise to an 88p tax and NI charge for a higher rate tax payer and 45p for a basic rate one.
Although more expensive, it does indicate voluntary compliance.
Key dates
The Agreement needs to be in place by the 6 July, following the end of the tax year.
The computations are usually required no later than the 31 August.
The payment of income tax and NI is due by the 19 October.
If you would like any additional information on how to apply for a PSA, or what may be included within it, then please do let us know.
An employer must report “mixed” termination payments in excess of £30,000 made in the period 6 April 2005 to 5 April 2006 by 6 July 2006.
Where the termination package consists solely of cash, regardless of the amount, or a mixed package does not exceed £30,000 in total, these do not need to be reported.
A “mixed” payment is one that comprises both cash and non-cash elements.
Failure to report such termination payments may result in penalties being sought by the Revenue.
Non cash benefits may comprise;
continuing private medical insurance past the termination date;
the transfer of a company car, phone or computer; or
the continued use of company car post termination.
If you need any assistance with the completion and submission of these reports please do get in touch.
CIS and Trading Names
HMRC has issued guidance on how the use of trading names will impact on the new CIS from April 2007.
A trading name has no status for tax purposes, and HMRC will rely on the main legal name attached to the individuals, partnership or company’s UTR. However, a single trading name can be attached to the UTR. This will obviously have an impact on any business that has multiple trading names but only one legal entity.
When the new CIS captures the tax records of a business, it will note the registered name, UTR and, if applicable, the NINO or company registration number (CRN). A business will also be able to add the trading name to this record, which will assist with verification procedures.
It is important that the above details are correct and complete as HMRC may not be able to verify a business as gross payment status if any details are missing, rendering the business liable to deduction on the payment being made to it.
For contractors making payment to sub-contractors using a trading name, HMRC have helpfully left this to the contractor to decide whether the trading name is genuine. Given the potential level of penalties with the new CIS, we would recommend caution.
When a contractor completes the monthly return, whether to return the registered name or trading name depends on which name was used when verifying the sub-contractor. It is essential to always return the UTR and either NINO or CRN. Hopefully, the pre-completed returns issued by HMRC should help to alleviate this problem.
Finally, whenever a subcontractor changes it’s payment status (from gross to net, net to gross or changes the rate of deduction) HMRC will contact the contractors who have used that subcontractor within the past two years to advise of the change. If the name of the subcontractor is not recognised, for example because of trading names, the contractor will have to verify the details with HMRC.
New CIS and Innocent Errors
HMRC have recognised that contractors will ‘inevitably make occasional errors’, and that the concept of credit notes, a.k.a. negative transactions, is incompatible with the CIS. These instructions are designed to compliment the booklet CIS340 which should have been received by all contractors within the past couple of months.
A set of guidelines has been drawn up to help contractors decide whether they need to amend the monthly return or contact HMRC. In addition, HMRC has advised that correcting a mistake will not expose a contractor to penalty additions, or jeopardise the contractor’s gross payment status. However, where the mistakes are not innocent, minor or irregular, penalties and removal of gross payment status will be considered.
Generally, HMRC will only need to be contacted when a monthly return does not reflect what was paid or deducted, and any subsequent amendment cannot be made in a later return. (See table in our .pdf version of this newsletter)
As always, we look forward to seeing how these proposals work in practice.
This page was last updated on Friday, January 04, 2008.
