P11D Explained: tips for completing your P11D

2022 saw the return of the annual Christmas party for many organisations, and it will be back on HMRC’s agenda to check that any benefits in kind are reported correctly - so there may be issues to consider from a P11D filing perspective.

Remember, HMRC accepts that no taxable benefit arises on an annual event if the cost (including guests) does not exceed £150 a head including VAT. Since December 2020, this exemption can also apply to the cost of providing online events for employees including providing food and drink at their home for the event (even if this is by way of a voucher).

The £150 a head limit may apply to more than one function during the year if the total cost of the functions does not exceed £150. For example, if there were three functions in one year costing, say £80, £60 and £40 per head respectively, it would be possible to exempt the first two (as the total is under £150) and pay tax on the £40 function. If the cost of a single function exceeds £150 per head, an employee will be taxable on the total cost (not just the excess).

With the cost-of-living difficulties in 2022, many employers will also have provided some extra benefits for employees to help them enjoy the festive season. While some may fall within the exemption for ‘trivial benefits’, others such as shopping or restaurant vouchers must be reported. Even where such benefits replaced a traditional Christmas party, there will be no exemption, so unless you choose to settle the tax and NIC through a PAYE settlement agreement, they will have to go on employees’ P11Ds. 

For the exemption to apply, it is necessary for it to be a formal annual function, not just, say, an informal drink. However, informal events such as an externally hosted zoom quiz for staff may fall within the ‘trivial’ benefits rules.

The statutory exemption from tax and NIC for trivial benefits costing £50 or less means there is no need to report qualifying ‘trivial’ benefits on P11D forms. During COVID, many employers have given small items to staff (for example, at Christmas instead of a staff event) so it is important to make sure that the exemption applies. 

There are four qualifying conditions that must all be met:

• The benefit is not cash or a cash voucher
• The cost of providing the benefit, or in some circumstances the average cost per person of providing the benefit, does not exceed £50
• The benefit is not provided through a salary sacrifice arrangement or any other contractual obligation, and
• The benefit is not provided in recognition of particular services performed by the employee in the course of the employment or in anticipation of such services.

The exemption applies equally to benefits provided to the employee or to the employee’s family or household.

If the employer is a close company, and the benefit is provided to an individual who is a director or other office holder of the company (or to a member of their family or household) the exemption is capped at a total cost of £300 per tax year. If any of these conditions is not met, the benefit is taxed in the normal way, subject to any other exemptions or allowable deductions and it must be reported on a P11D as appropriate.

Many people changed their lifestyles during the pandemic, and this may have led some company owner/directors to seek new recreational activities such as boating, driving classic cars or using holiday cottages or other luxury assets owned by their company. It is vital to make sure these benefits in kind are reported correctly as HMRC frequently search for such items during compliance checks.

Box L: Assets made available to employees without transfer

This is not the most common type of benefit in kind, so if you have not come across ‘assets made available’ for a while, don’t forget that HMRC changed the benefit calculation rules back in April 2017. There is a detailed method of calculating the taxable value (cash equivalent) of an asset provided to an employee which is made available for private use. 

Information required

You will need a clear description of the asset and the market value (in most cases, cost) when the asset was first applied as an employment-related benefit. This does not apply to land. For land, the rent that might reasonably be expected to be obtained on a letting from year to year is required. Then you will need to know the amount of salary or cash pay foregone by the relevant employee under Optional Remuneration Arrangements rules and any amount made good by the employee or that has suffered a tax deduction.

Calculating the benefit

1. Start with the annual cost of the benefit of an asset (but not land): 20% of the market value (for land, the annual cost is the value of rent and the following steps do not apply).

2. Deduct any amounts for days when the asset is unavailable for private use. This is calculated pro rata and will include:

• The day before the asset is first available, and the day after the asset is no longer available
• If for more than 12 hours in any day, days when:
  • The asset is not in a fit condition to use, or
  • An unconnected person has possession of it by way of a lien over the asset, or
  • The asset is used in such a way that is it is not being used by, or at the direction of the employee or director (or their family or household), or
  • A day when the employee or director is obliged to and actually does use the asset in the performance of their duties, and does not use it privately.

This means that if on any day there is both private and business use, the ‘unavailable for private use’ rules do not apply.

3. Where appropriate, apply the sharing rules. Where an asset is available to more than one employee or director (including their respective family and household) for private use at the same time, the benefit is first calculated for each employee and then reduced on a just and reasonable basis so that the combined total for all is no greater than the annual cost of the benefit.
 

Practical points

1. Accommodation, cars and vans are chargeable using special rules and are reported in other sections.
2. Where assets are not available for private use for specific periods, it will be important to retain detailed records of each period and the reason why the asset was not available.
3. No benefit arises on mobile telephones where only one is provided per employee - unless the mobile is provided through an OpRA arrangement.

Where an employee agrees to a reduction in gross pay in return for their employer providing a benefit of some kind these are known as Optional Remuneration Arrangements (OpRAs) and there is a prescribed way that the benefit must be valued. This applies to calculations for cash allowances (such as a car allowance), flexible benefit packages with a cash alternative, and standalone salary sacrifice and salary exchange schemes.

How the OpRA rules work

Where an employee has benefits in kind, under the OpRA rules, taxable figure for P11D purposes will be based on the higher of:

• The amount of pay given up by the employee, and
• The taxable value of the benefit in kind.

This applies to all benefits in kind, including those previously exempt from tax, except for some specific exclusions including:

• Employer pension contributions
• Pensions advice,
• Childcare vouchers and employer-provided childcare,
• Cycles and cyclists equipment under the Cycle to Work scheme, and
• Cars with emissions of 75g CO2/km or less.

Note that where a cycle is provided under a Cycle to Work scheme, the requirement to undertake ‘qualifying journeys’ on the cycle was removed for 2020/21 and OpRA exemption can still apply.