P11D Blues!

RAY CADMAN puts the annual form P11D chore under the microscope and asks 'Does it have to be like this?'.

THE FORM P11D has been around in one form or another for the past 50 years, but underwent major cosmetic surgery last year to accommodate the introduction of Class 1A National Insurance contributions. Correctly completed, they should, in theory, feed into (and indeed provide) the figures for the form P11D(b) return which all employers now have to make. As there are penalties for incorrect completion it is therefore, or at any rate should be, a chore to be taken seriously by any employer. So how easy is it?

Sources of help

The Revenue provides guidance in three ways. There is the Revenue website, which includes online access to the Schedule E Manual, among others. For benefits and expenses reporting, the written 'bible' is undoubtedly Booklet 480, a veritable cornucopia of advice and worked examples, full of helpful appendices. Lastly, there is the four-page P11D Guide, which goes through the form section by section, with numerous cross-references to Booklet 480 and its pay-as-you-earn/National Insurance siblings, CWG 2 and 5.

The website and Booklet 480 are, perhaps, more commonly accessed by practitioners and tax specialists. Most harassed payroll departments, if they consider such matters at all, will place their reliance on the P11D Guide. But, in many instances, putting their faith in the guidance given will go unrewarded. In places, the advice is flawed or confused but, as we will see, this is often a consequence of the incoherent layout of the form P11D itself.

Construction of the form

The form P11D in its present incarnation owes more to historical accident than sound planning. Over the years, it has varied in length from two, three or four pages and is now back to two again. The various sections have moved about all over the place. For example, in the years immediately prior to 1996-97, car and fuel scale charges were reported at sections A1 and A2 respectively, travelling and subsistence was at D8, company vans at D9, living accommodation at D19, to mention just a few.

There was then a major change in layout following the introduction of self assessment: in particular, for the first time the boxes were numbered so as to correspond with those in the employment pages of the self-assessment returns. The introduction last year of brown and blue boxes to separate out National Insurance Class 1A from non-Class 1A items was no doubt intended to help, but has actually only served to reinforce the haphazard appearance of the form. Readers are advised to have a form P11D to hand at this stage. Note that it has:

• three boxes 1.12 (one brown and two blue) split over two sections (A and B);
• columns for two vehicles at section F but only one box each of 1.16 and 1.17;
• columns for two loans at section H, but with two boxes 1.19;
• no box 1.20 (it used to be for mobile phones);
• no less than six boxes 1.22 — four browns and two blues — spread over four sections, J,K, L and N;
• a further six boxes numbered 1.23, all crammed into a single section O.

On top of this, there is a section M (share-related benefits) which has no box number at all and which is completely otiose, since there are reporting arrangements quite independent of the form P11D for share-related benefits.

There are other idiosyncrasies with the layout, the worst being the treatment of relocation expenses. At section J (box 1.22 brown), one has to report eligible relocation costs in excess of the £8,000 cap. (Eligible relocation costs below £8,000 do not get reported at all, but one has to remember that the £8,000 can be spread over more than one tax year.) The P11D Guide directs us to report non-eligible costs at either section N (1.22 brown) or section O (1.23 blue). Which one is the correct one, however? That is easy; non-eligible benefits go in section N and non-eligible expenses in section O. Why can there not be just a single section for relocation expenses which is then split down into the three sub-categories?

There are two possible answers to this rhetorical question. Either no-one in the Revenue has identified the problem, or no-one has bothered to sort it out. It is, in my view, a product of the 'cut and paste' mentality which has characterised successive revisions to the form.

Vouchers

There is a classic example of the cut and paste mentality at section C, vouchers or credit cards. This category was added many years ago following the enactment of what are now sections 141 to 143, Taxes Act 1988. At that time the section of the form P11D on which it appeared was at, or very near to, the end. The P11D Guide contains the same wording to this day. Paraphrased, it says:

'Enter the total cost of... all expenses and other payments met by credit cards you provided, except... expenses already entered under a previous heading.'

This made perfect sense when the section was placed after all the other reportable categories. The problem is that now it is at section C, before practically everything else. Moreover, the only two sections before it are assets transferred and payments made on behalf of the employee, neither of which will reflect company credit card payments (note the reference in the guidance to credit cards you provide). Taken literally, the existing wording cannot possibly be followed. After the word expenses, it should read, '... which are more appropriately reportable under another heading...'. Alternatively, it should be placed at the end of the form again.

There can surely be no more confusing section on the form than this. Time and again I come across clients, and often practitioners, who put business travel and subsistence payments (and sometimes entertaining expenses) met by company credit cards into this section. The amounts can often run into several thousands of pounds and when the total figure gets copied onto the self-assessment return, and relief is claimed in box 1.32, a section 9A notice will eventually follow as surely as night follows day. This is because Revenue officers expect box 1.32 to be a claim in relation to box 1.23 entries. (As an aside, I have never been able to understand why, with the exception of professional fees and fixed expenses, the self-assessment return only has two possible boxes for a section 198 claim, one for travel and subsistence, and one for everything else.)

Some Revenue Schedule E compliance officers instruct employers to report business travel paid by credit cards at section C. Once this instruction was given, even though the employer had a dispensation for business travel and subsistence. The justification given is that the introductory sentence at section O of the P11D Guide states, 'Take care not to enter amounts that are entered in section C'. But when one receives a dispensation for business travel and subsistence, it does not say 'excluding train tickets, etc. paid for on company credit cards'.

Transferred assets

Another major flaw in the Guide is in section A, assets transferred to an employee. The P11D Guide is commendably brief here. One is instructed simply to enter the market value of the asset at the date of transfer, or any additional costs incurred.

Market value will be correct if, say, the asset is a car which was previously subjected to a scale charge; or an asset which has not previously been the subject of a 20 per cent annual value charge, but in many cases the asset in question has been in use by the director or employee. To be fair, careful study of paragraph 6.8 of Booklet 480 reveals that the correct tax treatment here is to take the cost of the asset when it was first applied as a benefit and deduct from that the total benefits previously charged to tax under the annual value rule. But how many people will check that booklet when filling in the forms P11D? The P11D Guide makes not the merest hint of such a possibility, and even tax specialists have slipped up on this, by just following the P11D Guide notes.

Home telephones

Another potential pitfall is the treatment of home telephone costs. For some years, home telephone has had its own separate line under section O, expenses payments made to or on behalf of an employee. The line for the rental element disappeared when the existing style was introduced five years ago, which can make the section 198 claim tricky.

But the really confusing part is that most home telephone bills should not be reported here at all. Section O is comprised entirely of blue boxes, which means that the expense should be one which has been incurred by the employee. The P11D Guide confirms this, saying that a figure should be shown here '... where the employee contracted directly with the supplier...'. However, for years tax professionals have been telling clients to make the company the subscriber, in order to avoid Class 1 National Insurance. The result is that most clients now have (in strictness anyway) a Class 1A liability and, moreover, on the gross amount paid. The P11D Guide cannot seem to make up its mind where, exactly, to report this liability, employers are instructed to report the benefit at section K... or L... or M.

Class 1 National Insurance

In theory, an entry in box 1.23 (blue) means that Class 1 National Insurance contributions will have been accounted for on the private element. This leads us nicely on to the whole crux of the problem with Class 1A reporting. Class 1A is merely the final culmination of years of anti-avoidance gap-plugging.

To pick up a Biblical theme, in the beginning there was nothing, except for the rules on pecuniary liability. Then came the rules outlawing the use of unit trusts, gold, diamonds, etc., then tradeable assets and, as recently as 1999, vouchers. Finally, the Revenue got hold of the ball and said, 'Blow this for a game of soldiers, we are going to make all benefits liable to employers' National Insurance'. So it came to pass that everything would be rendered to Caesar that was truly Caesar's.

So, why do we still need all the ancient rules which contrive to charge Class 1 National Insurance? I know there could still be employees' National Insurance to pay in some cases, but this is almost incidental. The war was always fought on the battlefield of employers' National Insurance avoidance, and the Exchequer has well and truly won that war. Given the extra one per cent on employers' and employees' National Insurance being charged from next April, is it not high time that the Class 1 rules were simply done away with? To continue to have to analyse whether a benefit falls under Class 1 or Class 1A is an unwelcome anachronism, especially when one reads of moves (sic) to reduce the burdens of red tape on businesses.

Bureaucracy gone mad

As an example of this overly-bureaucratic approach, vouchers must not be included in a pay-as-you-earn settlement agreement unless that agreement is already in place before the vouchers are awarded. How many businesses ring their advisers about this before the event (typically at Christmas)? I would venture to suggest that the Revenue would collect a lot more Class 1A duty if this were to be the only mechanism for subjecting benefits to National Insurance. My observations thus far are that if something can go into a blue or a brown box, it will more often than not go into the blue. But that is not to say that it will have suffered Class 1 National Insurance.

Changes to the primary legislation would be needed to achieve a revision of the form. But even without this, the whole of the form P11D and the supporting guide notes are in urgent need of overhaul. If one were to sit down now and design a form from scratch then, in the words of the mythical Irishman, to be sure, you would not be starting from here! It seems to me that the rather bizarre box numbering is desperately trying to accommodate the self- assessment return boxes, but it should really be the other way around. While we are looking at redesign, why are employers told to report expenses payments which have already suffered tax under pay-as-you-earn? Have you ever known anyone put these on a form P11D?

Redesign could also tackle, for example, section E (box 1.15, blue), which says 'Car and mileage allowances paid for employee's own car'. However, it does not mean just mileage allowances. The P11D Guide says that here anything paid in connection with an employee's own car, such as road tax, insurance, servicing, fuel, etc., should be entered here. The problem is that the employer is then further directed to enter these costs at section N (brown) if the supplier is paid directly for these things, or the employer has his own fuel pump. The heading should simply read 'Expenses and allowances in respect of employee's own car'. (Note that allowances paid up to the new Revenue approved mileage allowances will no longer be reportable with effect from the current tax year.)

That limit again

Is it not also high time that the whistle was blown on the £8,500 threshold for P11D reporting? The £8,500 limit was set in 1978 and, had it been increased in line with earnings, would now be well over £30,000. Clearly, it has been the desire of politicians of both the governing parties to let this figure wither on the vine, so it is unrealistic to expect it to be magically increased.

Even better, now that the Chancellor has admitted that National Insurance is a tax, why not merge employee's National Insurance into the income tax rates? It would certainly make the long overdue form P11D redesign easier!

 

Ray Cadman is a former Special Compliance Office Inspector, now working as a senior tax consultant for Garbutt & Elliott, a large independent practice based in York. He can be contacted on 01904 341200 or by e-mail at rcadman@garbutt-elliott.co.uk.