COMPLIANCE
change which comes in on top of many other changes in recent times. I am writing to highlight a number of obstacles the EPG has identified, which we anticipate may make this a difficult journey, and add considerable cost burden and complexity to payroll processing, as follows.
Increased administration Employers will need to gather information more quickly to establish and calculate the anticipated BiKs value for tax purposes so it can be payrolled in each pay period for all relevant employees. This is a complete change from the current system of obtaining the actual costs and values after the end of the tax year and submitting P11Ds by 6 July, and it will directly impact the net earnings of employees. Forecasting accuracy will be essential. The data may need to be collated from numerous independent sources, placing increased demands on payroll and benefits / reward staff, and increasing time and administration costs. These costs will be unlikely to be upfront, but rather, ongoing, as new information will come in constantly in relation to the BiKs. All BiKs Currently, the employment taxes legislative provisions within ITEPA 2003 do not facilitate the payrolling of living accommodation benefit and beneficial loans. All other BiKs can be payrolled voluntarily. Many employers do this already and declare the class 1A NICs on the P11D(b) as well as submitting P11Ds for the living accommodation and beneficial loans separately, by 6 July following the tax year in which the BiKs were enjoyed. However, we understand HMRC is proposing not to change the underlying legislation in relation to the two BiKs which cannot currently be payrolled. This will mean that the burden of performing calculations in each pay period would fall on the employer in relation to these two BiKs. Estimating and forecasting has limitations, and those limitations need a solution that balances HMRC’s desire for accuracy and unacceptable levels of additional burden on employers. I can advise that EPG members, as trusted stakeholders, have made strong representations in this regard to the HMRC policy team, pointing out that the legislation must be changed first to save layers of complexity in the years following the mandation. We do not have much faith that the legislation will ever be upgraded once mandation comes in if it isn’t changed now. We believe a cost-benefit analysis should be undertaken to determine whether wholesale payrolling of benefits is the most cost-effective solution at this time, considering the legislative barriers and the additional cost to employers. A mixture of mandatory payrolling of straightforward benefits combined with improved form P11Ds with automated processing may be a better solution. We have several suggestions relating to how these issues can be resolved and will be happy to discuss with you and your senior policy team at a time of your choosing. Software As all BiKs will need to be processed through payroll software in future, it is important to ensure that software providers can deliver what is necessary. Software developers first need to understand the changes being made before they can design and build the programmes and carry out pilots and testing of payroll software changes. Additional fields will be necessary to push the data through RTI, and it is hoped that it will not be necessary to recreate the whole P11D, but instead, find a different format for the process. Again – there is time and administration cost involved here. Employee cash flow One such consideration is how many BiKs can be processed through any one pay period which will result in deductions from pay. Note that under the Income Tax (Pay As You Earn) Regulations 2003 6 the amount of tax deducted from a payment of salary cannot exceed 50% (this is something known as the ‘overriding limit’ 7 ). Some individuals who have been in receipt of BiKs in the previous tax year (2025/26) will commence payment of the tax through their tax code on those BiKs. If BiKs are then payrolled from 6 April 2026, this will lead to an overlap situation whereby they are paying the tax on 2025/6 and 2026/7 simultaneously, until the overlap period ends at the end of the 2026/27 tax year. In some cases, this may result in hardship, and employers will need to consider what steps they might be able to take to mitigate that possibility. It is essential that HMRC finds a suitable workaround on this matter, which is suitable for employees, employers and HMRC’s tax revenue stream. ‘Making good’ principle, third party BiKs and the official rate of interest: clarification needed Some employees enter into arrangements to ‘make good’ all or part of the value of a BIK to reduce their tax liability. It is not currently clear how this might work under the new regime. A similar question arises for BiKs provided to third parties which are usually reported under a taxed award scheme. It is also not clear whether the official rate of interest, which fluctuates throughout the tax year, can be set at the beginning of each tax year going forward to avoid the need for interest values to be recalculated at each pay interval.
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| Professional in Payroll, Pensions and Reward |
Issue 100 | May 2024
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