Reimbursing employee benefits – are you getting it right?
How you provide certain benefits to your employees matters – here’s why
Employee benefit provision – why it matters
The Chartered Institute of Taxation (CIOT) has called for the tax treatment of employee benefits-in-kind to be simplified, such that the tax position is determined by the benefit itself rather than whether the employer incurs the cost directly or reimburses the employee. We agree. Future simplification would reduce the compliance and enforcement burdens that the current regime places on employers, employees, and HMRC, but in the meantime, employers should take steps to ensure that they have treated benefits-in-kind and employee reimbursements correctly for payroll and reporting purposes. This article looks at what employers should consider to ensure their obligations are met.
Providing benefits versus reimbursing employees – why does it matter?
At present, there are a number of benefits where the tax treatment differs depending on whether the employer provides the benefit directly or reimburses the employee for the cost of procuring the benefit themselves. For example, employers can provide employees with home working equipment without a tax or NIC charge arising where certain conditions are met, but this does not apply if they reimburse an employee for home working equipment or services they purchase themselves.
For some employers, this distinction may have been confused by the introduction of a temporary COVID-19 easement, which meant that employees could be reimbursed in the 2020/21 and 2021/22 tax years for equipment they purchased, where this was for the sole purpose of enabling them to work from home due to the coronavirus outbreak and it would have been exempt if provided by or on behalf of their employer. However, this temporary easement no longer applies, and from the 2022/23 tax year onwards employers who have reimbursed employees for home working equipment and services will need to ensure that tax and NIC have been correctly applied.
As we highlighted in our response to the Office of Tax Simplification’s (OTS) call for evidence on hybrid and distance working, this inconsistency in tax treatment is often not appreciated by employers and does not appear to support any policy aim.
Indeed, the current complexity appears, on occasion, to challenge even HMRC. For example, guidance on the tax treatment of employer provided eyesight tests, spectacles, and contact lenses published in HMRC’s Employment Income Manual previously suggested that a payment towards the cost of spectacles required for visual display units (VDU) use could be exempt from tax where certain conditions were met. However, it was recently amended to state that if such costs are reimbursed to the employee, a taxable benefit does arise – which is the correct position. Employers who previously relied upon this HMRC guidance may not be aware of this recent change, and so unexpected tax and NIC liabilities could arise.
Key points for employers to consider
The OTS’s findings on hybrid and remote working published in December 2022 noted this to be an area where straightforward change was called for. Whilst it’s possible that the Chancellor might announce the Government’s response to the OTS report at the Budget, this is uncertain. Employers should therefore ensure they understand the current rules and apply them correctly in the meantime.
As we approach the end of the 2022/23 tax year, employers should therefore review their employee benefits/reimbursed expenses to ensure any tax reliefs that are claimed are in fact due, and that they are treated correctly for payroll withholding and reporting purposes.
Key questions to ask include:
- How do we know which benefits are provided directly to employees, through vouchers, or by reimbursing costs incurred by our employees?
- Where we expect benefits to be exempt from income tax and NIC, how can we demonstrate that all qualifying conditions are met (e.g., in some cases, ensuring that the benefit is made available to employees generally on similar terms)?
- If we currently provide a benefit in a way that does not qualify for tax/NIC relief, could we change how we provide it to reduce costs and enhance employees’ total reward?
- How could we demonstrate to HMRC that our processes and controls are robust and, where relevant, satisfy our Senior Accounting Officer that they can certify appropriate tax accounting arrangements are in place?
- Could technology reduce our risk?
How KPMG can help
KPMG works with UK employers across all sectors to ensure their employment tax compliance is robust, and to improve the effectiveness of their reward and benefits strategy and employee value proposition.
If you would like to talk through how KPMG can support you with this, please get in touch with the authors of this article or your usual KPMG contact.
Colin Ben-Nathan, a director in KPMG’s Employment Solutions practice, issued the CIOT’s call for reform in his capacity as Chair of the CIOT’s Employment Taxes Committee.
