Incentives

After all the hype, Self Assessment is finally here in a meaningful way. This month will see millions of employees receiving the new-style tax returns, and undoubtedly asking their employers for help.

For employers, the most tricky part of the new regime will be dealing with employee benefits. Gone will be the days of just providing the Inland Revenue with information and leaving it to them. It will be down to companies to work out the taxable value of the benefits and incentives they provide to staff – and soon. This encompasses some of the most complex areas of the UK’s tax system.

The first new date to note under the new system is 31 May, the deadline for giving the employee a copy of Form P60 (the annual certificate of pay and tax deductions), though this should not trouble too many employers, as long as they are aware that there is now a specific deadline.

But the next deadline, the annual declaration of expenses and benefits, is the crucial one. The information on Form P11D must now be given to employees, as well as the Inland Revenue. The deadline for doing this is now 6 July after the tax year end (formerly 6 June). While this is a month longer, that small advantage will be dwarfed for companies by the task of having to work out the cash equivalents of all these taxable benefits for themselves.

Where perks are given to employees of other companies (for example, promotional gifts) the donor company may have to provide the recipients with P11D-style information – again, by 6 July after the tax year end. Similarly, if you know that your own employees receive such perks from other companies, you may have to include details on their P11Ds.

Penalties may be imposed for failure to comply with these new rules – in certain cases, up to u3,000 per form per employee.

These new rules have been introduced to ensure employees have all the information they need to complete and file a tax return on time. The first tax year for which the deadlines apply is 1996/97 – that means, for example, that you must get P11D information for the tax year 1996/97 to your employees by 6 July 1997. If your accounting system cannot cope with the new requirements, you don’t have much time left to sort it out.

So what exactly is the “cash equivalent”? The term is defined by the Inland Revenue as “the amount which is taxable for each benefit, before any deductions for expenses which the employees may wish to claim”. Often this is not simply the cost or the market value. Your payroll staff will need to know the exact tax treatment applicable to each type of benefit, and have available the information needed to calculate the taxable amount.

The general rule is that the cash equivalent is the cost to the provider, less any amounts made good by the employee. For benefits which fall under this general rule, there are likely to be few problems. Unfortunately, many common benefits have special rules for calculating the taxable value, and it is here that difficulties are likely to arise. Examples include company cars, mobile phones, living accommodation and employee loans.

The P11D must also include details of business entertainment expenditure reimbursed to the employee (if you do not have a P11D reporting dispensation for entertainment), including whether the expense is to be disallowed in the company’s own tax computation, so that employees can decide whether they can claim a deduction for entertainment expenditure.

If an employer has a fixed profit car scheme (FPCS), certain details must now be disclosed to employees, again by 6 July following the end of the tax year – either the taxable profit under the FPCS arrangements, or details of the car/motor mileage allowances paid and the number of business miles travelled by the employee for which the allowance was paid.

The one area which will undoubtedly cause an administrative nightmare, especially for those in the media, airline or hotel industries or any business where perks and freebies are the norm, is third-party benefits – that is, benefits provided to employees, because of their employment, but by someone who is not their own employer. Previously, these did not have to be disclosed other than by ticking a box on Form P35. But from 1996/97 onwards, if third-party benefits or expense payments are provided, then these will need to be disclosed, either to the employee or to the Inland Revenue, depending on the circumstances, by 6 July.

The penalties associated with late filing and incorrect or incomplete P11Ds apply equally to third-party benefit reporting.

But all is not lost. There are some steps you can take to help deal with the problems of Self Assessment.

Consider negotiating a dispensation with the Inland Revenue for certain business expenses. If you already have one, then review it to see whether it needs updating or replacing. The value of a dispensation is that the expenses it covers need not be included on the P11D, thus reducing the risk of error occurring, and in turn the risk of a penalty arising for an incorrect P11D. It is important that employees are made aware of any dispensations so that they do not include expenses unnecessarily on their tax return.

If you do give perks to other companies’ employees, you will be in a better position if you have “arranged” the perks with the other company in advance, so that the onus is on that company (the recipients’ employer) to report the benefit.

But above all, you should review your accounting system quickly to ensure it is adequate to collate the information required and meet the deadlines for the 1996/97 tax year. This review could be carried out in the form of a PAYE health check, with Self Assessment in mind. Software packages are available to assist with P11Ds.

Last but by no means least, know the rules. Employers should be considering running a training programme, so that they and their staff fully understand the new rules.

Employee benefits are intended to boost staff loyalty and motivation.

Companies must ensure, through preparation, that Self Assessment does not cost their employees unnecessary tax on what are supposed to be perks.

Leslie Ferrar is a remuneration tax partner at KPMG.