Company Benefits and Expenses – Areas to Consider: Employee Benefits

Employers have until 6 July to report any taxable benefits and expenses provided to their employees (including company directors) during the 2020 tax year on the forms P11D, and will have to settle any National Insurance arising on these by 19 July.

These forms cover everything from company cars to employee loans and Mat Waters, a Manager in our Halesworth and Lowestoft offices, will be writing a series of articles covering the main areas to be considered when it comes to both providing and reporting benefits and expenses.

The series began by looking at company vehicles and continues by looking at a number of other benefits which can be provided to employees and directors during the year.

Interest-free loans

While interest free loans to employees and directors fall under the heading of employee benefits, if used right they are a cheap, convenient method of personal borrowing if the company has sufficient funds in the bank.

HM Revenue & Customs (HMRC) will only treat an interest-free loan as a benefit if it exceeds £10k to any one employee and, if this amount is exceeded, the taxable benefit is equal to the interest on the loan at their official rate of 2.5%. This makes borrowing an amount of up to £10k a more attractive option than an employee or director going into their overdraft or taking out a personal loan.

However, as is often the case, other taxes need to be taken into consideration.

While taking a £10k loan would not give rise to a taxable benefit, HMRC understandably don’t want company directors taking what would be a tax-free £10k out of a company as a loan rather than either salary or dividends. Should a loan be taken out by a ‘participator’ (a person, or spouse of a person, who has a shareholding or in the company) then the loan is required to be repaid within 9 months of the end of the corporation tax period in which it is taken. This means that for a company with a year end of 31 March 2021 could provide a loan of £10,000 on 1 April 2020 which – provided it is repaid by 31 December 2021 (21 months later) – would not give rise to any tax charge on either the director or company.

Should the loan above not be repaid by this date, the company would be liable to tax at a rate of 32.5% on the outstanding amount of the loan at 31 December 2021 regardless of it was under £10k.

With being just one day late making the difference between having a 21 month interest-free loan or a tax charge of £3,250, it is important that the loan rules are understood and so be sure to seek advice from your usual contact if you are wanting to withdraw money from your company in excess of your salary and dividend package.

Private health and critical illness insurance

When considering if an insurance policy should be treated as a taxable benefit or not, it is important to determine who the beneficiary of such a policy would be.

For most “Key Man” policies, these are the company insuring themselves against the loss of income and additional costs resulting from the disruption caused by losing a key member of staff due to illness or injury. So long as the policy is drafted so that the company is the beneficiary then no benefit arises on the individuals) covered. In essence, the company is insuring its employees like it would any other assets.

For policies where an employee or their family will be the beneficiaries of the insurance pay out then the employee in question will be in receipt of a benefit equal to the annual insurance premium.

When a financial services organisation proposes any policy relating to healthcare, critical illness or death in service it is important to establish not only the tax treatment but also the employment benefit position. The policy where the beneficiary is a single director could be sold on the basis that the premiums are allowable against corporation tax, but this is dependent on it being treated as a taxable benefit which, without knowing their personal tax treatment, might end up incurring more tax personally than it saves in the company. 

In circumstances where the cost of the premium is allowable for corporation tax, it is important to remember that the employer is required to pay Class 1A National Insurance of 13.8% on any benefit reported on forms P11D so the overall saving will be nearer 11% rather than at the 19% rate of corporation tax. 

Accommodation

As part of an employment, rent-free or subsidised accommodation could be provided which is either owned or leased by the employer.

This is one of the more complex areas of employee benefits where, depending on the circumstances, this could be exempt from being assessed as a benefit or involve a calculation requiring the property’s cost, the 1973 gross rating value as assessed by the local authority or the value at the time the employee moved in.

The provision of accommodation will be exempt from being treated as an employee benefit if it can be demonstrated that the employee can’t perform their work duties properly without it. One example of this would be if a farm cottage was provided to an agricultural worker who was required to be on hand throughout the day to tend to livestock. There are also certain industries where it is usually expected for accommodation to be provided, such as a pub manager living upstairs, which can also be treated as exempt.

When determining if an exemption applies, it is important to distinguish between employees and directors as the latter would need to demonstrate they are a full-time employee and hold less than 5% of the shares in the company.

Where an exemption won’t apply, it is important to discuss the situation with your usual tax advisor so that the history of the property and its use in the company can be reviewed and the correct benefit calculation carried out.

Your usual tax adviser will also be able to consider any other property tax implications as over the past few years HMRC have introduced new tax charges on properties held within companies.

Should the company own or lease any residential property with a market value of £500,000 at 1 April 2017 then this will fall within HMRC’s Annual Tax on Enveloped Dwellings (ATED) regime and could be required to pay an annual charge starting from £3,700 if it cannot be demonstrated that the property is used within the business e.g. let out to a third party on a commercial basis, being developed for resale or occupied by a farm worker as in the example above. 

Other assets provided for personal use

A company may also provide other assets to its employees for their personal use other than cars, vans, or property. One example of this would be if an employer provides IT and entertainment equipment to an employee for their personal use, while retaining ownership.

The employee will receive a taxable benefit based on 20% of the market value when the asset was first provided to them, plus any annual running costs relating to the equipment. If the employer rents the asset, then the annual rental charges should be substituted for the 20% of market value if these are a higher figure.

Where there is a business element of usage required as part of providing the asset, such as a takeaway delivery driver being provided with a moped, then the benefit can be reduced by the proportion of business use.

What can be paid to an employee without a benefit arising?

In the third and final instalment of the series I will be looking at what can be paid to employees without needing to be reported and how to ensure what employers consider to be business expenses don’t end up being assessed as a taxable benefit on their employees.

For more information, get in touch.