How to Deal With Expenses Payments and Benefits in Kind - Advice For UK Employers

At this time of year, employers have many deadlines be on top of to ensure they do not encounter problems with HM Revenue and Customs (HMRC).

No doubt you managed to complete your Employers End of Year Returns (P35) ahead of the filing deadline and you are now in the process of dealing with the dreaded forms P11D (return of expenses payments and benefits in kind). Delays can be expensive, but it is equally important that you get the returns right. Don't be rushed into submitting the forms unless you are confident they are correct. If you have any doubts always seek professional advice.

Penalties for non or late filing

This year's forms must be submitted to HM Revenue and Customs (HMRC) by 6 July 2009 and failure to do so can lead to significant penalties being charged. It is at least comforting to know that these penalties are not automatic. In the first instance, HMRC must refer the failure to submit the forms to the relevant tax tribunal. In turn, the tribunal can charge an initial penalty of up to £300 for each return which is submitted late. If the failure continues after the initial penalty is awarded, there can be further penalties of up to £60 per return for each subsequent day that the delay continues. Although in isolation these amounts might not appear to be significant, if the delay continues and a large number of employees fall into the P11D category, the penalty can soon become significant.

For example, if an organisation has 200 employees requiring a P11D and the forms are not submitted for 6 months, the tribunal could award a maximum penalty of in excess of £2 million. Should HMRC decide to instigate such proceedings before a tribunal you will receive prior notification. If this happens, make sure you take immediate action and submit the relevant P11Ds without further delay. If you manage to do this before the tribunal sits you should be able to avoid penalties altogether. However, don't fall into the trap of rushing the forms and risking errors in their completion. The penalty for submitting an incorrect return is a maximum amount of £3, 000 per return, so handle with care.

The position with regards forms P11D (b) is somewhat different. This form is the employer's return of Class 1A National Insurance Contributions (NICs) and is normally submitted with forms P11D. Once the P11Ds have been completed the employer calculates the amount of Class 1A NICs due in respect of the taxable benefits and expenses included on the returns and this amount is entered on the form P11D(b). Once again this return has to be submitted to HMRC by 6 July 2009, and there are penalties for failure to meet this deadline. However, on this occasion the penalties are automatic, being £100 per month for each 50 employees or part thereof. So, continuing with the example above, the automatic penalty for a delay of 6 months for an organisation with 200 employees would be £2, 400. HMRC dispensations. At this time of year, and with the above in mind, we make no apologies for reminding you of the value of an HMRC dispensation. Dispensations are formal agreements with HMRC that allow certain items to be excluded from P11D returns. Using a dispensation can greatly reduce the time and effort needed to complete the returns. Items for which dispensations are most commonly granted include:

business travel and subsistence expenses;
costs of hotels and other overnight accommodation;
business entertaining of third parties;
business calls made from employees' home or mobile telephones; and
annual subscriptions to approved professional bodies.

Tax offices will grant dispensations once they are satisfied that all expenses payments are reasonable in amount and properly vouched, recorded and controlled. In particular it must not be possible for any employees or directors to authorise their own expenses.

Even though you may not benefit from a dispensation for your 2008/09 P11Ds, now is the time to start planning for the current year. Having got the chore out of the way for yet another year there is always a temptation to breathe a sigh of relief and do nothing further. Next thing you know you have reached the end of yet another tax year and it is too late to get a dispensation. Act now by reviewing your procedures and deciding which expenses could be included in the dispensation. It might take a little time to get the agreement in place so the sooner you start the process the better. HMRC normally encourage employers to complete form P11DX when applying for a dispensation. However, before doing this it makes sense to take professional advice and make sure your expense claim procedures can stand scrutiny should HMRC decide to review matters in a little more detail before agreeing to the dispensation.

Where a dispensation applies, any item it covers does not have to be reported on employees' personal tax returns. For those who already have a dispensation, it is equally important to make sure it is kept up to date. In 2008, HMRC made the following statement with regards the retrospective revocation of a dispensation: 'Legal advice has suggested that our current practice is unnecessarily restrictive and as a result we are changing our practice in relation to retrospective revocation of a dispensation. We will now consider revoking a dispensation retrospectively where there is any evidence of misrepresentation or negligence by an employer, or other person paying expenses or providing benefits in kind. Examples of this can include:

If an application for a dispensation did not provide all the relevant information, or If there was a change in the way the expenses and benefits were made available to employees meaning the qualifyingconditions were no longer met, and we have not been informed of the change.

This will not affect the great majority of employers who apply for and operate dispensations correctly. Revoking a dispensation retrospectively should only happen if it should not have been granted in the first place or if it should have been revoked when there was a change in the qualifying conditions which was not notified to us'. So clearly it is important that employers should review their existing dispensations on an annual basis and make sure that they do not fall into the trap of increasing any tax free allowances without the prior agreement of HMRC. For some employers, the P11D process can be a nightmare, but with some forward planning, and of course with an appropriate dispensation in place, the task should not be as burdensome as it might first seem.

Guide to completion of P11D

The various forms referred to in this article and a useful guide on the completion of forms P11D can be downloaded from the employers section of the HMRC website.

This article was submitted for and on behalf of Horwath Clark Whitehill, who own the copyright in the above text adapted from http://www.horwath.co.uk/hwClarkWhitehill/WhatsNew/pressRoom/detail.cfm?id=57

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