OTS tries to simplify benefits for contractors

Monday 3 February 2014

The Office of Tax Simplification is trying to make the submission of benefits simpler for umbrella and limited company contractors.

In its 'Review of Employee Benefits and Expenses' it proposes allowing businesses to process benefits for staff (including directors) via payroll in instances where it is deemed appropriate.

This will lower the amount of paperwork facing contractors and employers who currently have to submit a P11D to HM Revenue and Customs (HMRC).

Under changes to legislation, companies will add all of the value of their taxable benefits in kind to their payroll, whether or not expenses are covered by an exemption or dispensation.

However, key to any changes will be the notion of choice. The OTS claims employers must be able to select what benefits they put through and which they continue to submit via a P11D.

This must exist, as payrolling some benefits  - such as loans - will be difficult. Questions remain as to whether there should be a set list, but the OTS believes it should be down to choice.

Benefits employers select to add to payroll must be payrolled for all employees. This will ensure consistency and fairness.

Under the changes, Class 1A National Insurance Contributions (NICs) will continue to be paid in respect of the payrolled benefits after the end of the tax year.The difference will be that legislation will be changed to allow individuals to pay Class 1A NICs on a monthly basis as part of payrolling.

If introduced, the framework would need to be supported with "clear HMRC guidance", which will include information on how employers could payroll specific benefits.

"There would also be a streamlining of HMRC processes to remove benefits more quickly from the employee’s tax code when HMRC has been notified that the benefit is either being payrolled or is no longer being received by the employee," the OTS explained in its report.

"The general stance should be one of encouragement and facilitation to employers to move to payrolling, but without any suggestion of compulsion."

According to the OTS, this will simplify the entire process by reducing the number of P11Ds employers have to complete and submit. HMRC will also need to process fewer documents and processes will be easier for employees to understand.

What's more, the body maintains that payrolling is a "natural complement to Real Time Information".

Research suggests payrolling works in practice too, with a pilot taking place between May and October last year. Four large employers trialled the scheme and aimed to understand the most efficient way to approach payrolling.

"The pilot has produced positive findings, but to take this recommendation to the next level, we would welcome extending the pilot," the OTS explained.

"It is worth noting that our target is for the great majority of benefits and expenses to be

payrolled, with this approach becoming the norm. It is also worth noting that once an employer begins payrolling it would not be operationally easy for them to revert back."

For contractors and employers feeling bogged down in red tape, the proposals are likely to be welcomed. Indeed, each year businesses send around 4.4 million P11D forms, which have to be processed by HMRC and used to amend PAYE tax codes.

By Victoria McDonnell

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