Are efforts to simplify the rules of Benefit in Kind over-complicating the system, what changed?
Changes to taxation of Benefits in Kind (BiK)
From 6 April 2016, businesses are no longer able to apply for a dispensation and all existing dispensations will phase out. The Finance Act 2015 brought in three significant changes to taxation on expenses, supposedly in order to simplify the system of BiK-reporting. The change applies as of 6 April 2016.
- Abolition of the £8,500 threshold for taxing certain BiK
- Voluntary "payrolling" of BiK
- Replacement of dispensations with an exemption for paid or reimbursed expenses
Abolition of the £8,500 threshold for taxing certain BiK
The £8,500 threshold before taxing certain expenses and BiK will be abolished from 6 April 2016. This means that all expenses and BiK must be reported on form P11D, unless the business is registered for voluntary "payrolling".
The tax due on BiK can be deducted through payroll rather than through an individual's tax code providing that the business has already registered with HMRC PAYE online Services. Businesses that would prefer to payroll expenses, but failed to register by July 2015, must wait and register for the following tax year. Once registered, it is no longer necessary to file form P11D for BiK, but note that having the right system in place to make accurate calculations and checks is essential.
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For now, four BiKs can be payrolled:
- Car fuel
- Private Medical Insurance
- Subscriptions, such as gym membership
The rules governing expenses and benefits-in-kind
Treatment of Tax on BiK
Compliancy and record-keeping
It is essential to determine the correct tax for the expenses allowed and to check whether a matching deduction is due, and to maintain records of what has been paid or reimbursed just as it is currently
Scale rates are HMRC-approved flat rates paid for a particular expense, where instead of reimbursing the actual costs the cost is set using HMRC benchmark scale rates
. These are set as the maximum rate for qualifying subsistence for work-related travel without having to undertake a sampling exercise and agree a rate with HMRC. The benchmark rates will continue to be available under the new exemption and will be set through regulations.
Businesses can either use HMRC's benchmark scale rates for subsistence, or apply for a "bespoke scale rate".
If not using HMRC's benchmark scale rates for subsistence, an application can be made for a HMRC's bespoke scale rate
. In order to apply you need to provide evidence based on a sampling exercise to demonstrate that your proposed rates are a reasonable estimate of the expenses actually incurred. Where employers have recently agreed a bespoke scale rate with HMRC as part of their dispensation, they will be able to apply to continue to use that scale rate without providing further evidence until the fifth anniversary of the rate being agreed.
Expenses covered by an exemption include:
- Business travel
- Phone bills
- Business entertainment expenses
- Uniform and tools for work
And see also the HMRC guidance on trivial benefits in kind exemption
The benefits below must still be reported on form P11D
- vouchers and credit tokens
- employer provided living accommodation
- interest free and low interest (beneficial) loans, e.g. overdrawn directors' loan accounts
Whether or not the changes have simplified the system is debateable. True, payrolling BiK may result in fewer tax coding notices being issued, as well as fewer under- and overpayments of tax. The system needs to settle in first, so we would advise that you pay scrupulous attention to maintaining records and pay close attention to the rules. Eventually the move to payrolling should result in a more efficient way of collecting the right amount of tax throughout the year, forming a part of an employer’s Real Time Information (RTI) reporting obligations.
Please, as ever, if in doubt about expenses, BiK, or any other issue concerning your business, DNS is always ready to share its expertise.