In this contributed feature for HR Zone, Lesley Fidler of accountancy, tax and business advisers Baker Tilly looks at some of the key issues around this important procedure for notifying the Inland Revenue about staff benefits.

It would be convenient to assume that tax and national insurance law is in line with good business practice, so that what makes for good employer-employee relations has no tax consequences. Nice idea, but sadly that’s not how the law works. The Inland Revenue can’t tell you how to run your business, but it can insist that you apply the correct income tax and national insurance treatment to the way you choose to do things. In some cases the rules can be surprising.

As an aside, the Inland Revenue does not make tax and national insurance law; it merely administers it. Parliament makes the law – so better to complain to your MP than to your tax inspector if you want the rules changed. (In practice it is probably only the lobbying of professional bodies such as the Chartered Institute of Taxation and the responses to consultation processes that have any influence and some might regard that as minimal in the face of Government policy).

And so to form ‘P11D Expenses and Benefits 2002-03’. Whilst cash wages, salary, etc are expected to go through payroll in order for income tax to be deducted under the pay-as-you-earn scheme and for employer’s and employees’ national insurance contributions to be made, form P11D is the way in which the Revenue is told of non-cash items that fall into the tax and NIC net. It would be tempting to refer to these items as ‘benefits’ but that is only part of the picture. Certainly, company cars, free medical insurance and cheap loans need to be included on the form, but that is not all. As its title suggests, most expenses also need to be included in the return.

This statement is usually met with indignation, as it seems unfair that amounts that have actually been spent on genuine business costs should be taxed on the employee who happened to be the person who was asked to make the particular journey or incur the expense. Fortunately, that is not the end of the story and employees can make a corresponding claim for tax relief. The law tries to ensure employees cannot receive benefits under the guise of expenses by making all expenses taxable and allowing the employees to claim relief where due.

This is clearly a paper chase, with the employer entering amounts on one set of forms to bring them into the tax net, and employees entering similar amounts on other forms to take them out again. To deal with this, the Revenue will usually agree a ‘dispensation’ with an employer where it is satisfied that it is not losing any tax. The effect of a dispensation is that the particular items no longer need to be entered on the form P11D or the employee’s tax return. But, if there is no dispensation (which takes the form of a letter from the employer’s PAYE Tax District), then all expenses need to be included on the form.

Who needs a P11D?

The ‘Note to employer’ at the top of the form states: ‘Complete this return for a director, or an employee who earned at a rate of £8,500 a year or more during the year 6 April 2002 to 5 April 2003.’ With the introduction of the national minimum wage, this means that only part-timers are likely to fall outside the scope of the P11D. Even someone who joined six months into the tax year, with an annual salary of £12,000 is included. Whilst he or she many only earn £6,000 in the tax year, the rate at which it was earned was more than £8,500 a year. Whatever their earnings, company directors are subject to the P11D rules, except in very rare circumstances.

But as is so often the case with tax rules, the £8,500 limit is not entirely straightforward. It includes the value of any benefits or expenses that would be taxable if the employee did earn more than £8,500. So someone on an annual salary of £8,200 who is given free medical insurance for her whole family, costing her employer £400 a year, is treated as earning at a rate of £8,600 and so needs a P11D. If she reduced her hours so that her annual salary was only £8,000, the medical insurance would only bring the total up to £8,400 and as this is below the £8,500 limit, no P11D is needed and the medical insurance is not a taxable benefit. (Note that this only works with benefits that are services: goods are subject to a different rule and could well be taxable in any case).

Employees earning at a rate of less than £8,500 a year may need a form P9D – but that’s another story.

A small piece of good news is that employees and directors who have no benefits and no expenses (or whose expenses are entirely covered by the terms of their employer’s dispensation) do not need a P11D. In some cases this can be the entire workforce.

To make sure that the absence of any P11Ds is because none is due, and not because the employer has overlooked the issue, employers are required to complete form P11D(b) ‘Return of Class 1A National Insurance contributions due; Return of expenses and benefits – Employer’s declaration’ whether or not any P11Ds are submitted.

When is the deadline for submitting these forms?

6 July, which is a Sunday this year, is the day by which forms need to be with the Inland Revenue and by which employees and directors must receive a copy of their P11D information. Completion of the form P11D(b) includes calculation of the Class 1A national insurance contributions due from the employer, and this attracts interest if not paid by 19 July.

Where can I look for help in completing the forms?

Try your book-keeper, accountant or tax adviser. If you really need to do the work yourself, then try the Inland Revenue’s website for details of the half-day workshops that their Business Support Teams offer around the country http://www.inlandrevenue.gov.uk/bst/index.htm.

The Revenue’s ‘Employer’s CD-ROM’ has been issued to all the employers it is aware of and contains everything most employers will need in the way of forms and basic guidance. Look out specifically for booklet 480 which explains the rules for valuing P11D benefits. There is commercial P11D software available and advertised in the payroll press.

And what if I get it wrong?

The maximum penalty for an incorrect form P11D is £3,000 per form, but this is levied in only the most extreme of circumstances. In some instances the inspector will settle for only the lost tax and national insurance together with interest if mistakes are found.

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