P11D processing: tax on expenses and benefits through payroll: introduction
From 6 April 2016 employers can tax expenses and benefits through their payroll by adding the value of the expense and or benefit to their taxable income (payrolling) rather than providing them separately. Some employers were already applying this process using their own informal arrangements but HMRC has introduced a standardised process.
If employers are intending to or already payroll expenses and benefits, they must register with HM Revenue and Customs (HMRC) using the Payrolling Benefits in Kind (EBIKs) online service. More information about the process and service can be found at Paying your employees’ expenses and benefits through your payroll (GOV.UK)
All expenses and benefits can be payrolled, apart from the following:
- living accommodation
- beneficial/interest free and low interest loans
Employers can only register for payrolling for full tax years and they must register to payroll expenses and benefits in the following tax year (CY+1) any time up to 10pm on 5 April and from this point future years expenses and benefits will be carried forward as payrolled automatically.
Unless the employer or individual notifies us that this process has ceased, benefits and expenses will be carried forward as payrolled automatically.
The decision to payroll expenses and benefits for CY+1 can be reversed any time before 10pm on 5 April prior to the start of the new tax year.
When an employer completes the online payrolling procedure the following sequence is triggered overnight:
- NPS is scanned for expenses and benefits that can be payrolled
- any expenses or benefits in IABD with a value greater than zero that the employer has selected to be payrolled are removed from IABD
- the value of the expenses and benefits removed from IABD is added to the estimated pay held as the customer now needs to pay tax on this as though it were taxable income
- the individual’s tax code is updated to remove the payrolled expenses and benefits
- if there have been changes to IABD, a Contact History note will usually be added when NPS is updated with details of the payrolled benefits
- a new tax code will be generated and issued during the next annual coding run. However, if it is after the annual coding run, the code will be issued as part of the usual daily coding run
Payrolling of expenses and benefits can continue indefinitely once this has been registered. If an employer is payrolling; a P11D (b) is still required but employers using the service no longer need to file P11Ds unless they have non-payrolled benefits to declare.
If an employer payrolls car and car fuel they mustn’t complete P46 (Car) forms as they are deducting the tax due on these benefits at source. All payrolled benefits and expenses need to be included when employers report their payroll information in a Full Payment Submission (GOV.UK). However, payrolling will not impact RTI / Employer penalties, these will be issued as normal and the business as usual process would need to be followed for appeals.