Until the 2016/17 tax year, any reimbursed expenses had to be reported on a form P11D and was assumed to be a taxable item, even if incurred wholly for business, unless the company had already applied for a formal “dispensation”.
Now, dispensations have been replaced by general exemptions from tax and reporting. BUT you must meet the following two key conditions:
a) You must be satisfied that the expense is wholly “allowable”. Allowable means incurred “wholly, exclusively and necessarily in the performance of the duties of the employment”. This is an onerous test (as numerous court cases have shown); AND
b) Your company must have a system in place for checking that all payments or reimbursed expenses are wholly allowable – thus do not include any disallowable items or elements and are not excessive. We can assist with this checking process.
We set out below a number of “benefits” provided by a business to its director(s) and /or employee(s) which may or may not be taxable and thus reportable on a form P11D, depending on the specifics of each item.
1. Expenses that are Partly or Wholly Personal (i.e. not Wholly Allowable)
Where you incur a cost privately AND put it through as an expense in the company’s books BUT the cost is either wholly private or is mixed business and private use, a taxable benefit can arise.
An example would be broadband or mobile phone costs where there is both private and business use.
In this case, you’ll need to let us know:
- In the context of a phone and broadband, whether the contracts are in the company’s or your personal name. It is vital that the contracts are put into the company name; AND (for all other examples of mixed business and private costs):
- the exact cost of the wholly personal or the private element of mixed business and private items.
The simplest option is for us to treat any private element of costs as drawings through your director’s current account – in effect you bear the cost yourself and we vote dividends to clear the amount.
If you don’t do this and the cost is put through as a deduction against profits, HMRC can seek penalties and interest as follows:
a) Expenses that are Wholly Personal
These should have been put through the payroll. Thus tax and employee’s and employer’s NICs would have been due
b) Expenses that are only Partly Personal
(i) If you can’t identify the precise business element of the cost, then
- The whole amount should go through the payroll, subject to tax and NICs
- The employee is able to claim tax relief separately for the business element, via their tax return.
(ii) If you can clearly identify the business element, then
- The employer should process just the private element cost through the payroll
- The business element remains exempt from tax, without any reporting requirement.
(N.B. – if you wish to process any private expenses through the payroll, you must get HMRC’s permission before the start of the tax year in which you are to process the payroll).
2. Trivial Benefits
“Trivial benefits” provided to employee(s), directors, officers or family members of officers are exempt where:
(i) The cost of providing any single benefit is less than £50 per person, per item; and
(ii) The benefit is not cash or a “cash-voucher” (i.e. a voucher that can be turned into cash). A voucher for grocery shopping etc. is not deemed a cash-voucher where the shop leaves unspent amount on the card rather than giving back cash for the unspent amount; and
(iii) The employee/officer is not contractually entitled to the benefit; and
(iv) The benefit is not provided in recognition of services performed.
- When calculating whether you’ve exceeded this £50 limit per item:
- The cost includes VAT
- You can use average the total spent when providing a benefit to a group of employees
Director(s), Company Secretary and Family Members of Officers
In addition, HMRC has imposed a total cap of £300 to the total number of items costing no more than £50 for directors, company secretary and family members of officers.
To expand on this point for directors, company secretary or family members of officers:
- You could provide 6 items costing no more than £300 but the 7th item would be taxable as it takes you over the £300 cap
- You can choose the smallest value item which takes you above £300 and only tax this one item
- The cost of us preparing your personal tax return exceeds £50 – so strictly this should be a taxable benefit. However, we do not propose to report the cost of a personal tax return paid for by the company as a benefit. If challenged we would argue that the cost amounts to £150 including VAT (in reality the minimum cost is more like £200, plus VAT). We would argue that for most directors, they only need to prepare a tax return because HMRC insist that they must because they are directors and that therefore you could not operate a company unless you also did a tax return – thus preparing a tax return was part and parcel of operating a company business and not a personal expense at all.
- Assuming we could successfully argue this point and that the true cost was deemed to be no more than £150 including VAT, this would only leave a balance of £150 (or a maximum of 3 items of £50 each) from the £300 cap.
- Any benefit for a family member who is not an employee or office holder (and who thus does not have their own £50 limit) is treated as part of your own £300 limit
If you want to check out more information on trivial benefits, click on this link to HMRC’s website - https://www.gov.uk/government/publications/tax-exemption-for-trivial-benefits-in-kind-draft-guidance/tax-exemption-for-trivial-benefits-in-kind-draft-guidance#employment-income-manual-eim-21864---particular-benefits-exemption-for-trivial-benefits---conditions-to-be-satisfied
Certain benefits are specifically exempted through legislation (see 10. below). Any such specifically exempted benefits shown in section 10. below should not be counted as a Trivial Benefit.
3. Private Medical Insurance
Where private medical insurance (PMI) is paid for through the company AND the cost is claimed in the profit & loss account and thus attracts corporation tax relief, this must be reported on form P11D as a taxable benefit.
If you only pay tax at basic rate, it is slightly better for the company to pay for the PMI cost than bear it personally.
If however, you are a higher rate or additional rate taxpayer, it is better for the cost of the PMI to be shown as a debit, cost or drawing through your director’s account, i.e. paid for/borne personally, than being paid through the company.
Do speak to us about this if you wish.
4. Company Car
If a car is provided to a director or employee which is available at any time for private use (this includes home to work travel), then there is a high, fixed taxable benefit.
If any car costs (such as just the servicing or insurance costs) are put through the company as an expense, then the company is deemed to have provided a company car.
In general we do not recommend that the capital costs or any running costs of a car are put through your company UNLESS the car is:
- New or Unused; AND
- The CO2 emissions are 75 grams or less
Please refer to our separate fact sheet called “Car Benefit” to read more – click http://www.dbeckman.com/Resources/Download-Resources
5. Mileage Allowance – Where you use your own Vehicle
Where you simply reimburse any business mileage at:
- 45 pence per mile for the first 10,000 business miles; and
- 25 pence per mile for any business miles above 10,000
no tax arises on the mileage allowance paid.
If you pay above these fixed rates, the excess is subject to tax (strictly through the payroll and is thus liable to both tax and NICs).
You can also reimburse at the following fixed rates without any tax:
a) Own Motorcycle - 24 pence per mile (no limit)
b) Own Bicycle - 20 pence per mile (no limit)
c) Passenger Payment - 5 pence per mile (no limit)
6. Private Car Fuel Provided
In almost cases, it is NOT worth having private fuel paid for by the company. It is afr cheaper and easier to simply pay at the HMRC approved rate of 45 pence per mile (see 4. above).
Please refer to Section 4 of our separate fact sheet called “Car Benefit” to read more – click http://www.dbeckman.com/Resources/Download-Resources
7. You owe your Company £10,000 or more
If you draw £10,000 or more out your company in a tax year and there are not sufficient company profits left, after allowing for corporation tax, to vote dividends to clear these excess drawings, a taxable benefit arises for you personally.
This applies if you became overdrawn by £10,000 or more at any point in the tax year, not just at the year end.
If you are not sure whether this could have happened, call us. We’ll need to analyse the movement on your director’s account and the timing of withdrawals to see if you did become overdrawn and if so, by how much.
If you were overdrawn by £10,000 or more at any time, we’ll then be able to eliminate the tax charge by putting a small amount of interest on the interest free loan you’ve received through as further drawings. We’ll assess which of two methods for calculating interest to use to minimise the cost and tax for you.
The figures we’ve worked out will need to be reported on a form P11D, albeit that we’ve ensured no tax actually arises.
8. Subsistence Payments
Re-imbursement to a director or employees of subsistence expenses can be paid tax free and without any reporting requirement where:
a) The subsistence is incurred in conjunction with business travel; AND
b) You recover the actual amount spent (based on specific invoices); OR
c) You recover at HMRC’s set round sum rates (see (i) further below); OR
d) You recover at higher rather than HMRC’s rates but only if you’ve had HMRC prior “approval” to such higher rates (see (ii) below)
(i) You can claim using HMRC’s set round sum amounts instead of basing claims on specific costs. This eases administration as you don’t need to keep receipts. BUT to pay these rates you must meet all the following conditions:
The set scale rates you pay are just:
Minimum journey time away from normal place of business
Maximum meal allowance
Where you pay the £5 or £10 rate AND the qualifying journey lasts beyond 8pm, a supplemental rate of £10 can be paid to cover the additional expense necessary incurred as a result of working late. A meal is defined as a combination of food and drink.
- the travel must be in the performance of an employee’s duties or to a temporary place of work, on a journey that is not substantially ordinary commuting; and
- the employee should be absent from his normal place of work or home for a continuous period in excess of five, ten or fifteen hours; and
- the employee should have incurred a cost on a meal after starting the journey
(ii) If you pay above the scale rates shown above, please contact us
9. A Company Van
To avoid any taxable benefit, ideally it should be made clear as a condition when the van is first made available for a director or employee that the only allowable private use of the van is home to work travel and “insignificant” other private use.
HMRC treat using the van for regular supermarket shopping or social or personal activities as more than insignificant – in which case a benefit in kind of £3,170 arises for 2016/17 (£3,230 for 2017/18).
10. Other Benefits
Some of the more common other benefits which are specifically exempted from any tax or reporting requirement are shown here:
a) Annual Events/Parties
Essentially, you are allowed a cost of £150 per employee. For more detailed conditions, please request our separate factsheet or see HMRC’s manual here: https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim21690
b) Incidental Overnight Expenses
Essentially, overnight expenses at a hotel (such as the drinks’ bar or laundry) are exempt up to:
- 5 per night for overnight stays in the UK; or
- £10 per night for overnight stays outside the UK.
For the detailed conditions, please call us or see here: https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim02710
c) Transfer or Moving Costs
Such moving costs specifically as a result of your employment, which are paid for by the employer, are exempt up to the first £8,000
For the detailed conditions, please call us or see here: https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim03100
d) Long Service Awards
Essentially a gift, other than in cash, for long service of at least 20 years, up to a value of £50 can be exempt from tax.
For the detailed conditions, please call us or see here: https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim01500
e) Uniforms or a Uniform Allowances
Sometimes the cost of providing a uniform or paying a uniform allowance can be exempt.
See here for Uniforms: https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim32475
Or here for a Uniform Allowance: https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim10400
What Happens if you have a Taxable Benefit in Kind?
1. First we have to report the item on a form P11D (as opposed to us simply submitting a £Nil form P11D(b) declaration). This may mean a small one-off additional fee for our services depending on whether your existing fixed fee already factored in having to do this or not.
2. The amount of the benefit is treated as additional taxable income in the year. If the amount can’t be covered by the tax free personal allowance (£11,500 for 2017/18), you will need to pay tax at either 20%, 40%, 45% or even 60% depending on the level of other income you have.
3. In addition, the company will need to pay 13.8% Class 1A employer’s National Insurance Contributions (NICs) on the amount of the benefit. This needs to be paid by 19 July following the tax year in which the benefit arose. The amount of Class 1A NIC due will be shown on the company’s form P11D(b) declaration. We will advise you how you pay this and the reference number to quote to HMRC.