“Just because a gift is provided each year, or is provided to all staff members, does not mean that the employee has a contractual entitlement to it.”

Trivial benefit traps – Contractual obligations

The trivial benefits exemption allows employers to provide employees with low cost benefits free of tax and National Insurance and any reporting obligations. For the purposes of the exemption, a benefit is trivial if the cost per head is not more than £50. Where trivial benefits are provided to an officer of a close company or a member of their family or household, an annual cap of £300 per tax year also applies.

For the exemption to be available, the benefit must not be provided in return for services provided and the employee must not be contractually entitled to receive the benefit.

Contractual entitlement

Contractual entitlement is wider than simply inclusion in the contract of employment. Consequently, the fact that the contract makes no reference to the provision of trivial benefits is not enough to satisfy the conditions for the exemption.

In the December 2019 issue of their Employer Bulletin, HMRC highlighted a number of ways in which a contractual obligation may arise, including:

  • a letter to the main contract document
  • a staff handbook
  • a redundancy agreement
  • an employer union agreement

If any of these provide for the employee to receive the trivial benefit, the exemption will not apply.

Beware of creating a ‘legitimate obligation’

Employers seeking to make use of the trivial benefits exemption should also be wary of falling into the ‘legitimate expectation’ trap; a contractual obligation may also arise is the employee has a legitimate expectation to receive the benefit.

In the December 2019 issue of Employer Bulletin, HMRC illustrate this with an example of an employer who provides employees with a cream cake each Friday. While there is no contractual obligation for the employer to provide the employees with a cream cake on a Friday, the fact that the employer does so every Friday creates a legitimate expectation, taking the provision of the cakes outside the trivial benefits exemption.

Frequency seems to be a problem here – HMRC seemingly do not apply the legitimate expectation argument where a benefit is provided annually, even if it is provided each year. HMRC’s Employment Income Manual at EIM21867, states:

“Just because a gift is provided each year, or is provided to all staff members, does not mean that the employee has a contractual entitlement to it.”

The guidance instructs HMRC officers that they “should not normally challenge modest gifts that are provided infrequently to employees, just because they are given to employees each year – for example, a Christmas or birthday gift”.

Good practice

To avoid falling into the legitimate expectation trap, vary both the nature and timing of trivial benefits provided to employees.

Partner note: ITEPA 2003, s. 323A.

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In many cases, an LLP is likely to be more attractive to those who would have formed a partnership rather than a limited company. We explain why in today’s blog.

Weighing up LLPs

A limited liability partnership (LLP) is similar to an ordinary partnership in that a number of people or limited companies join together and share the costs, risks, and responsibilities of the business. They also take a share of the profits and pay income tax and NICs on their share of the partnership profits.

However, an LLP differs from an ordinary partnership in that its debt is usually limited to the amount of money each partner invested in the business and to any personal guarantees given to raise business finance. Therefore, members have some protection if the business runs into difficulties because their liability is restricted in general terms to the level of their investment.

So, what other advantages can an LLP as a trading vehicle offer?

Advantages

Along similar lines to a company, an LLP is a separate legal person, meaning that the members are not personally or jointly liable for the LLP’s debts, and all contracts are between the LLP and its clients or third parties. If the LLP becomes insolvent, a member’s personal liability is normally limited to the amount of their agreed capital contribution plus the value of any personal guarantee. However, where negligence is involved, members may be personally liable to the full extent of their assets if they have assumed personal responsibility for the advice or work.

The separate legal entity status also means that there is no need, for example, to transfer legal title to property on a change of membership. LLPs also have unlimited capacity and can enter into contracts and hold property in the same way as an individual.

Members of the LLP are usually taxed as if they were partners and not employees or directors. They are therefore not liable to pay PAYE or Class 1 NICs.

Businesses often find it easier to recruit new members to an LLP than to an ordinary partnership, where the prospect of unlimited liability can be a major disincentive to potential partners.

Disadvantages

The benefits of limited liability combined with a favourable tax treatment should not be underestimated, but they do come at a price, most notably the associated disclosure obligations.

Where the LLP’s profit before members’ remuneration exceeds £200,000, there is a requirement to report the amount of profit attributable to the highest paid member (but not their name). Other disclosure includes total members’ remuneration, total members, average members’ remuneration and related party transactions.

There will be costs to set up the LLP and ongoing filing fees. The administrative costs in notifying clients and suppliers and transferring bank accounts, leases and agreements will need to be considered.

Corporate-type accounts have to be prepared, circulated to each member and filed on a public register within nine months of its year end. LLP accounts must comply with UK generally accepted accounting principles and other specific regulations.

Loans and debts due to members (the equivalent of partnership current accounts), are required to be shown as liabilities rather than as part of capital alongside the partnership capital accounts. This in turn reduces the LLP’s net worth and may affect its credit rating and borrowing capacity.

In relation to tax matters, the following areas will need careful thought:

  • tax relief for losses in trading LLPs is restricted
  • there will be no scope for tax-efficient share incentives for staff as there are with a company
  • anti-avoidance provisions may apply to ‘disguised employment’ situations

Weighing up the pros and cons, in many cases, an LLP is likely to be more attractive to those who would have formed a partnership rather than a limited company, but who ultimately seek the benefit of limited liability.

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Read our quick guide to payroll for new employees covering tax codes, the new starter checklist and student loans.

Payroll – how to deal with new starters

From a payroll perspective, there are various tasks that an employer has to perform when they take on a new starter.

For 2019/20 an employer needs to operate PAYE where the employee earns more than £118 per week (the lower earnings limit for National Insurance purposes). However, if any employees earn more than £118 per week, the employer must comply with RTI and report all payments to employees to HMRC (even those below £118 per week).

Work out what tax code to use

The tax code is fundamental to the operation of PAYE and it is important that the correct tax code is used. To ensure that a new employee is taxed correctly, the employer will need to know the correct tax code to use.

If the employee has a P45 and left their last job in the current tax year, the employer can simply use the code shown on the P45. If the employee left their last job in the 2018/19 tax year, the code on the P45 can be updated by adding 65 to codes ending in L, 59 for codes ending in N and 71 for codes ending in M.

If the employee does not have a P45, the employer will need to ask the employee to complete a new starter checklist.

New starter checklist

The new starter checklist enables the employer to gather information on the new employee. Even if the employee has a P45, it is still useful for the new starter to complete the checklist as it contains information which cannot be gleaned from the P45 (such as the type of loan where the new starter has a student loan which has not been repaid).

As far as establishing which tax code to use, the employee will need to select one of three statements:

  • A: ‘This is my first job since 6 April and I have not been receiving taxable Jobseeker’s Allowance, Employment and Support Allowance, taxable Incapacity Benefit, State or Occupational Pension’.
  • B: ‘This is now my only job but since 6 April I have has another job or received taxable Jobseeker’s Allowance, Employment and Support Allowance or taxable Incapacity Benefit. I do not receive a State or Occupational Pension.
  • C: ‘As well as my new job, I have another job or receive a State or Occupational Pension’.

The following table indicates what code should be used for 2019/20 depending on what statement the employee has ticked.

Statement tickedTax code to use
A1250L on a cumulative basis
B1250L on a Week 1/Month 1 basis
CBR

Does the employee have a student loan?

The employer will also need to establish whether the employee is making student loan repayments. If the employee has a P45 and is making loan repayments, the student loan box will be ticked. However, the P45 will not provide details of the type of loan. Student loan information can be provided on the new starter checklist, enabling the employer to ascertain whether the employee has a student loan, and if so what type, and also whether the employee has a post-graduate loan.

Tell HMRC about the new employee

The employer will need to add the new employee to the payroll and also tell HMRC that the employee is now working for the employer. This is done by including the new starter details on the Full Payment Submission (FPS) the first time that the employee is paid.

Partner note: The Income Tax (Pay As You Earn) Regulations 2003 (SI 2003/2682), reg. 67B and Sch. A1, para. 35—44.

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PAYE settlement agreements

A PAYE Settlement Agreement (PSA) enables the employer to pay the tax and National Insurance instead of the employee on those benefits and expenses included within the PSA. This can be useful to preserve the beneficial nature of the benefit, for example in respect of a Christmas or other function falling outside the associated exemption, or where the effort involved in reporting the benefit on individual employees’ P11Ds is disproportionate to the amount involved.

What can a PSA be used for?

A PSA cannot be used for all benefits – only for those which fall into one of the following three categories:

  • minor benefits and expenses – such as telephone bills, incentive awards outside the scope of the exemption and similar
  • irregular items – such a relocation expenses or the occasional use of a company flat
  • impracticable expenses and benefits in respect of which it is difficult to place a value on or to divide up between individual employees – such as staff entertainment or shared cars

A PSA cannot be used for cash payments or for high-value items such as company cars.

Items falling within the scope of the trivial benefits exemption can simply be ignored for tax and National Insurance purposes – they should not need to be included in a PSA.

Setting up and checking a PSA

To set up a new PSA, the employer should write to HMRC setting out the benefits and expenses to be included within the PSA. Once HMRC have agreed the PSA, they will send two draft copies of form P626. Both copies should be signed and returned to HMRC. HMRC will authorise the PSA and send a form back – this will form the PSA.

A new PSA must be agreed by 6 July following the end of the tax year for which it is to have effect.

A PSA is an enduring agreement. Once it has been set up it remains in place until revoked by either the employer or HMRC. Employers should check that an existing PSAs remain valid.

Impact of a PSA

Where a PSA is in place, the employee does not pay tax on any benefits included within the PSA – instead the employer meets the liability on the employee’s behalf. Also, there is no need to report benefits included in the PSA on the employee’s P11D, or to payroll them.

Instead the employer pays tax on the items included within the PSA grossed up at the employees’ marginal rates of tax. For Scottish taxpayers, the relevant Scottish rate of income tax should be used in the calculation.

As far as National Insurance is concerned, Class 1B contributions, which are employer-only contributions are payable at a rate of 13.8% in place of the Class 1 or Class 1A liability that would otherwise arise. Class 1B contributions are also due on the tax paid under the PSA (as the tax paid on behalf of employees is also a taxable benefit).

Settling the PSA

Form PSA1 should be used to calculate the amount of tax and Class 1B National Insurance due under the PSA. This should be sent to HMRC after the end of the tax year. The tax and Class 1B National Insurance must be paid by 22 October after the end of the tax year where payment is made electronically or by the earlier date of 19 October where payment is made by cheque.

Partner note: ITEPA 2003, s. 703 — 707;Income Tax (Pay As You Earn) Regulations 2003 (SI 2003/2682), regs. 105 – 117; Statement of Practice SP5/96.

Reporting expenses and benefits for 2018/19

Where employees were provided with taxable benefits and expenses in 2018/19, these must be notified to HMRC.

The reporting requirements depend on whether the benefits were payrolled or not.

Benefits not payrolled

Taxable benefits that were not payrolled in 2018/19 must be reported to HMRC on form P11D. There is no need to include benefits covered by an exemption (although take care where provision is made via an optional remuneration arrangement (OpRA)) or those included within a PAYE Settlement Agreement. Paid and reimbursed expenses can be ignored to the extent that they would be deductible if the employee met cost, as these fall within the statutory exemption for paid and reimbursed expenses.

The value that must be reported on the P11D depends on whether the benefit is provided via an OpRA, such as a salary sacrifice scheme. Where the benefit is provided other than via an OpRA, the taxable amount is the cash equivalent value. Where specific rules apply to determine the cash equivalent value for a particular benefit, such as those applying to company cars, employment-related loans, living accommodation, etc., those rules should be used. Where there is no specific rule, the general rule – cost to the employer less any amount made good by the employee – applies.

Where provision is made via an OpRA, and the benefit is not one to which the alternative valuation rules do not apply, namely:

  • payments into pension schemes
  • employer provided pension advice
  • childcare vouchers, workplace nurseries and directly contracted employer-provided childcare
  • bicycles and cycling safety equipment, including cycle to work schemes
  • low emission cars (Co2 emissions 75g/km or less)

the taxable amount is the relevant amount. This is the higher of the cash equivalent under the usual rules and the salary foregone or cash alternative offered. The taxable amount is the cash equivalent value where the benefit falls outside the alternative valuation rules.

Payrolled benefits

Payrolled benefits should not be included on the P11D but must be taken into account in calculating the Class 1A National Insurance liability on form P11D(b).

P11D(b)

Form P11D(b) must be filed regardless of whether benefits are payrolled or notified to HMRC on form P11D. The P11D(b) is the Class 1A return, as well as the employer’s declaration that all required P11Ds have been submitted.

Paper or online

There are various ways in which forms P11D and P11D(b) can be filed. The simplest is to use HMRC’s online end of year expenses and benefits service or HMRC’s PAYE Online for employers service. Forms can also be filed using commercial software packages.

There is no requirement to file P11Ds and P11D(b)s online – paper forms can be filed if preferred.

Deadline

Regardless of the submission methods, forms P11D and P11D(b) for 2018/19 must reach HMRC by 6 July 2019. Employees must be given a copy of their P11D (or details of the information contained therein) by the same date. Details of payrolled benefits must be notified to employees by the earlier date of 31 May 2019.

Class 1A National Insurance must be paid by 22 July where paid electronically, or by 19 July where payment is made by cheque.

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Director’s loan accounts: recording personal expenses

HMRC commonly find errors in relation to directors’ loan accounts when making routine reviews of company tax returns. This article looks at the importance of maintaining proper records of cash and non-cash transactions between the company and the directors.

Directors’ personal expenses
A statutory rule states that a company may not deduct expenditure in computing its taxable profits unless it is incurred ‘wholly and exclusively’ for the purposes of the trade. As companies are separate legal entities that stand apart from their directors and shareholders they do not incur ‘personal’ expenses. However, many companies, particularly ‘close’ companies (broadly, one that is controlled by five or fewer shareholders (participators)), pay the personal expenses of the directors. It is important to note that where payments, either made to or incurred on behalf of a director, do not form part of their remuneration package, these amounts may not be an allowable company expense and may not therefore be deductible for corporation tax purposes. In such circumstances it may be appropriate for these items to be set against the director’s loan account. However, establishing whether a payment forms part of a director’s remuneration package can be complex.
Accounting disclosure requirements for directors’ remuneration include sums paid by way of expense allowance and estimated money value of other benefits received other than in cash. The money value is not the same as the taxable amount, although this is often used in practice. This means the onus is on the director to justify why amounts not disclosed in accounts should be accepted as part of the remuneration package rather than debited to his or her loan account.
Where the expenditure forms part of the remuneration package it will be an allowable expense of the company and the appropriate employment taxes (PAYE income tax and NICs) should be paid. Where the expenditure does not form part of the remuneration package the relevant amount should normally be debited to the director’s loan account.

Cash transactions
Cash transactions between the company and directors may have tax consequences. Broadly, at the end of an accounting period, if the director owes the company money, a tax charge may arise. Subject to certain conditions, a charge may arise where a director’s loan account is overdrawn at the end of the accounting period and remains overdrawn nine months and one day after the end of that accounting period. The tax charge (known as the ‘s 455 charge’) is the liability of the company and is calculated as 32.5% of the amount of the loan. The tax charge can potentially be avoided if the loan is cleared by the corporation tax due date of nine months and one day after the end of the accounting period.

Record-keeping
Good record keeping of all cash and non-cash transactions between a company and its directors is essential. Poorly kept records can mean that information provided is not accurate, which in turn may result in non-business expenditure incurred by the directors being incorrectly recorded or mis posted in the business records and claimed in error as an allowable expense. Conversely, justifiable business expenditure incurred by the directors may not be claimed or claimed inaccurately. Consequently, directors’ loan account balances may be incorrect resulting in s 455 tax being underpaid, or corporation tax relief not claimed by the company at the appropriate time.

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