Company directors and employees often receive work-related benefits in addition to a salary or wage. These are known as benefits-in-kind, and in many instances are taxable.
Often regarded as ‘perks of the job,’ failing to declare these benefits on your personal and company tax returns can result in heavy penalties from HMRC.
A straightforward way to identify a benefit-in-kind is to consider its ‘duality of purpose.’ This means that the item is used on a personal basis, as well as for the business. If the item purchased by your company is not going to be used wholly and exclusively for business purposes, it will be treated as a benefit-in-kind by HMRC.
As a result, your company will pay Class 1A National Insurance contributions on the benefit, with directors and employees being liable for income tax on the cash equivalent.
What are the common benefits-in-kind for directors?
Company cars and private fuel
CO2 emissions are used as the basis for your tax liability on company cars, with lower emissions offering reduced tax charges to encourage corporate environmental awareness. A percentage based on the CO2 emissions is deducted from the car’s list price when it was new (plus the value of any enhancements you’ve made to the vehicle), and this is the ‘cash equivalent’ value that you need to record. You should also declare any fuel bought by the company for private use as a benefit-in-kind.
Directors’ loans may be classed as a benefit-in-kind under certain circumstances. If you have taken an interest-free loan in excess of £10,000, as a director you may have to pay tax on the benefit received. Your company will also be liable for Class 1A National Insurance on beneficial loan interest.
Transfer of assets below their market value
If your company transfers ownership of an asset to you at less than its market value, a company car for example, then a benefit-in-kind arises in relation to the difference between its true market value on the day of transfer and the price you actually paid.
Payments made on your behalf
Any personal liabilities settled by your company will also attract a benefit-in-kind tax charge. Examples of payments made by the company on your behalf might include a mobile phone bill in your own name, travel costs that are not wholly for business purposes, or your personal tax bill.
Declaring and reporting benefits-in-kind
You need to complete Form P11D and submit it to HMRC by 6th July following the end of each tax year, either online or in hard-copy format. This form details the cash equivalent value of benefits-in-kind provided to directors and employees earning more than £8,500 during the tax year, or any director holding more than 5% in shares.
HMRC will fine the company for any late or incorrect submissions, although you have until July 19th to rectify the situation. After that, a penalty of £100 per month pro rata will be applied for every 50 employees included on the form.
Other benefits-in-kind for employees include subsidised childcare arrangements, reimbursed expenses, health insurance, and travelling expenses. As a director, you may find it more cost-effective in the long-term to pay for some items personally rather than through the company, simply to avoid triggering a benefit-in-kind.
If you’re undecided about what to do, or need more information about benefits-in-kind, Handpicked Accountants can put you in touch with a professional and reliable firm of accountants in your area. Our referrals are based on long-standing knowledge of each firm, and can be relied upon to provide you with the financial support you need.