Much has been written over recent months about the Office of Tax Simplification’s efforts to reduce the burdens of the P11D process on employers in the UK. All of the work the OTS has completed with third parties such as ourselves is not only welcome, but very much needed. However, it is too easy to confuse simplifying the process of P11D reporting with eradicating the need for employee transparency and accurate financial reporting.
The P11D return is an essential part of the process of reporting the financial burden that benefits in kind offer to both employees and employers. The range and variety of these benefits is the reason that benefits and expenses didn’t get ‘rolled in’ to the recent RTI (Real Time Information) changes – they are complex in their nature, and in many cases vary on a month by month basis, making real time reporting especially challenging, as the benefits are largely managed outside the core payroll system.
Although many observers will point to increased payrolling of benefits as the solution to ‘P11D complexity’, this misses the target in a number of areas. Although it could certainly simplify matters for employees by allowing their benefits tax burden to run in real time rather than a year behind, it does not remove the need for a ‘benefits statement’ or communication for the employee. An end of year reconciliation with HMRC will still be necessary (even if that is a simple ‘nil return’ for the employee), and most importantly, employers will still need to manage and calculate the Class 1A charges and contributions and report these on a P11D.
Payrolling some benefits can be relatively straightforward – for instance, you can take the annual premium of a health scheme and divide it by 12 to generate monthly payments, however even a simple benefit such as this can be complicated by in year variations and changes, as they are often managed outside of the payroll system. An employee may be able to see monthly salary alterations being applied to their salary (assuming their payslip can show this in sufficient detail), but will need some form of statement or report at the end of a tax year to reconcile the benefits they have received. This communication may no longer be called a P11D, but it is still very much a requirement.
However, once you embark on payrolling more complex benefits, such as cars and car fuel, the in-year variations will make real time updates of the benefit value far more complex. The calculations related to car and fuel assignment are not easy, and for that reason are handled by external systems. These will require a ‘closed-loop connection’ to be put in place with the payroll system to allow pay variations to be incorporated accurately and efficiently. Even then, a short narrative on a payslip can give little more than an indication of the financial implications, and a monthly ‘statement’ may be more appropriate – but an end of year summary will be essential.
HMRC understands that payrolling benefits is hard, which is why they still insist that you tell them in advance if you intend on submitting benefits that have been payrolled. Equally, they still require P11Ds and a P11D at the end of the year as reconciliation and confirmation of what has occurred during that period. In these cases it is essential that your P11D software is able to handle payrolled benefits correctly, and perform all of the necessary Class 1A calculations and P11D notifications in line with HMRC requirements.
The Republic of Ireland already has payrolling of benefits in place, and it has significantly reduced the payment time lag for employees, meaning they are paying far closer to the right tax at the right time – however it has demonstrated to those software companies that have implemented the solutions that there are pitfalls and complications to be managed, and more importantly it has taught those software providers how to deal with them, so they are ideally positioned for the changes coming in the UK in the near future.
In summary, the push by the OTS to reduce the number of P11Ds is a much needed exercise, and it will certainly lead to less P11Ds being issued to employees each year – however it will also mean that employers need to raise their games significantly to provide ‘statements of benefits’ to employees to clarify what has been paid to them, and when. These may even be needed on a more regular basis than a once a year.
Simplifying the P11D process is one thing, but removing the need to report accurate figures to HMRC and employees is something else completely, and remains a complex task.