Digital Tax Returns


Employing People - A Small Business Guide

When you engage the services of another individual in your business it is your responsibility to determine whether they are an employee or self-employed in their own right. In many cases this will be relatively straightforward and derive directly from the nature of the work they are undertaking and the contractual basis on which they are engaged. There are situations, however, where the position is not so clear cut and guidance exists to help clarify whether the relationship is one of employment or not. As an employer it is your responsibility to account to HMRC for the tax and national insurance due on your employees employment income through the PAYE and Real Time Information (RTI) system. In administering PAYE it is necessary to be able to assess fully the income and benefits-in-kind on which taxes and NIC’s are payable as well as the extent to which expenses and deductions can be made from salary before calculating tax.

Determining Employment Status
There are specific rules that determine whether someone is an employee or self employed – IR35 and the rules relating to ‘managed service companies’ and anti-avoidance rules that deal with the ‘sale of income from personal occupation’ and employment provided through third parties.

Factors pointing to employment include: the person carrying out the work personally; taking orders as to how, when and where to do the work; set hours; paid a regular salary including pay for sickness, overtime and holiday.

Factors pointing to self employment include: risking their own capital; carrying the cost of rework; freedom to appoint others to carry out the work; controlling where, when and how to do the work; providing their own equipment; regularly working for a number of different people.

See our Contractor Guide for further information on these Employment Status Factors.
Assessable Income, Allowable Expenses and Benefits
An individual who is resident and domiciled in the UK is taxed on their world-wide earnings. Non-residents are taxed on their UK earnings.

Generally, pay for income tax purposes includes wages, salaries, commissions, bonuses, tips and certain benefits in kind paid ‘in the nature of reward for services rendered past, present or future’. Pay for the purposes of Class 1 NIC’s is broadly the same as for income tax purposes although there are instances where the treatment differs. There is a distinction between employees earning more than £8,500 per year (and company directors) who are classified as P11D employees (because they are required to submit form P11D at the end of the tax year) and ‘non-P11D’ employees. Class 1A NIC’s are payable on virtually all benefits in kind on which tax is paid by P11D employees. Cash tips given directly to the employee without the involvement of the employer are generally not considered for PAYE purposes.

Tax and NIC’s on earnings is normally collected through the PAYE scheme by employers. Class 1 NIC’s are payable by employers and employees and Class 1A NIC’s on employee benefits are payable by employers only and accounted for at the end of the year.

Social security benefits – complex rules govern the tax treatment of social security benefits with the benefits being classified as taxable or exempt from income tax. The current complex system of working age benefits and tax credits is being replaced by universal credit which ‘should’ be completed by October 2017.

P11D employees - form P11D is the employers annual return of expenses and benefits. P11D employees are taxed not only on cash pay but also on the cash equivalent of benefits in kind.

P9D employees (lower-paid employees) - form P9D is the year-end form summarising taxable benefits and expenses for non-P11D employees. The tax treatment of benefits for non-P11D employees differs from that of P11D employees in that they are only taxed on benefits in kind if they can be turned into cash and then are only taxed on the cash that could be obtained (for example, the second hand value of a gift rather than its value new).

Expenses, deductions and Benefits – Specific Items

There are strict rules regarding the deduction of expenses for tax purposes and few expenses qualify. The general rule is expenses can be deducted if the employee is obliged to incur and pay as holder of the employment and that are incurred wholly, exclusively and necessarily in the performance of the duties of that employment.

Travelling expenses – qualifying travelling expenses can be deducted as long as it is not ordinary commuting between home and permanent workplace. However in most cases employers reimburse the cost of business travel thus offsetting the expense. There is a statutory system of tax-free approved mileage allowances for business journeys in an employees own transport – only payments above these mileage rates are taxable as benefits.

Other expenses:

  • Flat rate expenses allowances are available for the upkeep of tools and special clothing in various occupations.
  • Where it is necessary for an employee to work at home a deduction can be made for certain utility costs.
  • Contributions to a registered pension scheme are allowable.
  • Charitable contributions under the payroll giving scheme.
  • Professional subscriptions.
  • Capital allowances for the purchase of equipment required by the employees job – this does not include the cost of vehicles for which mileage allowances are available.
Dispensations are available for certain expenses, such as travelling expenses, that simplify the otherwise complicated process of declaring the initial payment of the expense as a taxable deduction and the reimbursement as a taxable benefit.

Removal and relocation expenses – incurred because of his job are exempt from income tax upto a maximum of £8,000 per move, qualifying conditions apply.

Provision of telephones and broadband services to employees for business purposes is generally held to be exempt from income tax.

All employees will pay tax on the provision of living accommodation, although there are some specific exceptions where, for example, accommodation is provided by the employer who is an individual and the accommodation is provided in the normal course of domestic, family or personal relationships or where the accommodation is provided for security reasons. The benefit is taken to be the rental value of the property and the tax calculated on the excess of the accommodation rental value provided as a benefit over any actual rental payments made by the employee.

There are wide ranging rules on the taxable nature of vouchers provided to employees. Both cash and non-cash vouchers are generally taxable – cash vouchers through the PAYE scheme and non-cash vouchers separately – although specific exemptions apply.

Motor cars – the benefit gained by the private use of a car provided for business purposes is chargeable to tax based on an appropriate percentage (from the cars CO2 omission figure) of the the price of the car (plus certain accessories). There is an additional charge for the private use of fuel that has been provided. Contributions made by the employee towards the cost of the car are deducted from the benefit. No reduction is available for contributions to the cost of the private fuel unless the contribution represents full reimbursement. There are exceptions and restrictions to the benefits for pool or shared use cars generally where personal use is incidental. The provision of car and fuel for private use attracts Class 1A employers (but not employees) NIC’s. The private use of vans made available for business use is also taxable except where the private use is limited to commuting, in which case there is no charge.

Cheap loans create a benefit where the interest charge paid by the employee is below the official rate where the loan is above £5,000. The benefit being the difference between the interest calculated using the official rate and the interest actually paid. There are certain qualifying loans that are exempt from this rule and commercial lenders who lend in the ordinary course of their business to the public do not create a benefit on their employees by lending to them even if the interest rate is below the official rate. Advances of expenses do not generally qualify as loans.

Exemptions exist for payments made by employers in respect of scholarships and apprentice schemes and for the payment, or reimbursement, of work related training courses.
PAYE and Real Time Information System
Under the PAYE system the employers are responsible for collecting and accounting for the tax and NIC on employment income. Real Time Information (RTI) was introduced from 6 April 2013 with the intention of improving the PAYE system. PAYE is managed electronically and the employer sends HMRC details of the payments and deductions, as well as details of the employees identity ‘on or before’ the employee is paid. This will mean weekly submissions for weekly paid employees and monthly submissions for monthly paid employees. There are extensive rules for the operation of RTI. There are provisions to allow the advance submission for periods when payroll staff are on holiday and currently a relaxation of the requirements for small (<50 employees) businesses. Commercial software packages are available to assist with the electronic management of the RTI PAYE requirements. Employers must make monthly payments of the total tax and NIC’s due and must also administer student loan deductions and account for these along with the tax and NIC.

Employers calculate the tax on each employees income by using the tax code they have been assigned by HMRC. The tax code represents the allowances available to the employee and adjustments for items such as additional tax to be collected on unearned income.

The employer must also maintain payroll records for their employees for at least the current tax year and previous 3 tax years. The self assessment rules require businesses to keep records for longer than this. Employers must provide their employees with an annual statement of their employment earnings (P60) and benefits (P11D or P9D).

Workplace Pensions Auto Enrolment
All employers will have to provide a workplace pension for their employees over the next couple of years. Whats involved in managing a workplace pension and which employees are eligible?
What am I required to do?
Every employer with at least one member of staff now has a duty to put those employees who meet certain criteria onto a workplace pension scheme. It is called automatic enrolment because it is automatic for your staff, who do not have to do anything, but it is not automatic for the employer. The employer needs to make sure their employees are enrolled.
Which employees are eligible?
Every employer must automatically enrol workers onto the workplace pension scheme if they:
  • are aged between 22 and the State Pension Age
  • earn more than £10,000 a year
  • work in the UK
When do they need to be enrolled?
Each employer has a date by which they need to have completed the automatic enrolment process. This is called their staging date and is based on the number of employees they have. HMRC have a staging date tool that can be used to find out the staging date: Staging Date Calculator
What needs to be done?
Before the staging date you will need to have assessed which of your staff members are eligible, chosen a pension scheme and informed your staff about your plans. The Pensions Regulator has a action planning tool to help you set out a plan for automatic enrolment: Automatic Enrolment Action Planner You will also need to nominate a contact that the Pensions Regulator can contact to deal with about the automatic enrollment process
What is the cost?
As well as setting up the scheme an enrolling your eligible employees you, the employer, are also required to contribute to your employees workplace pension scheme. The minumum contributions are 1% of your employees "qualifying earnings" rising to 3% by 2018. The employee is required to contribute 0.8% of "qualifying earnings" rising to 4% by 2018. Obviously, both the employee and employer can contribute more than the minimum.
Tax Points
  • Payroll software can alleviate some of the administrative burdens of managing PAYE with the RTI requirements. HMRC test and issue a payroll standard kitemark to packages that meet their PAYE requirements.
  • The provision of benefits to employees can be tax efficient for certain lower paid employees and in any case can often be provided at a lower cost than the employee would have to pay himself and therefore provide a net benefit.
  • In the case of providing fuel to employees for private use – the associated tax, VAT and NIC costs, including the administrative burden, can make it more cost effective to simply pay the employee an additional amount of salary.
Next Steps
Why not get in touch to discuss how we can help you deal with the accounting, tax and finance for your small business. Request a call back to arrange a free consultation: Request A Callback

Written by Accquant Chartered Accountants
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