Tax Talk: PAYE Settlement Agreements (PSAs): why you should have one
So you don’t yet have a PSA with HMRC? Find out what they are, what they cover and why they are a good tool for improving your employment tax compliance.
The new tax year means most companies face the usual headache of year end compliance. This includes reporting employee benefits on form P11D and calculating Class 1A National Insurance liability on form P11D(b).
Running alongside those forms some, but not all, companies must also report to HMRC under a PAYE Settlement Agreement (PSA).
Before we dive into the benefits of PSAs, it’s worth first remembering what should be reported on form P11D for your employees. In the absence of payroll reporting of employee benefits, form P11D is used to report all benefits and taxable expense payments provided to an employee during the tax year. The point to remember is the “all benefits” remit of the P11D.
What counts as a benefit?
Benefits come in many different forms. Easier to identify (and report) are private medical insurance, company car and accommodation. Less obvious, for example, are beneficial loan interest, reimbursement of home broadband costs and non-qualified relocation expenses. Where provided, they are probably considered part of the employee’s total remuneration package, so the reporting requirement is clear and (hopefully) fulfilled each year.
However, there are also likely to be perks you provide to your employees which neither you nor they consider to be an ‘employee benefit’. Unfortunately the tax rules do, so they must be reported as benefits to HMRC. Staff entertainment, certain employee gifts, food provided at working lunches, team building activities, and even the subsidy you pay for the weekly 5-a-side pitch are all examples of (potentially) taxable benefits. But few consider them as such and certainly don’t expect to pay tax. This is where a PSA comes in.
What is a PSA?
A PSA is an agreement between a company and HMRC which enables the company to report certain agreed employee expenses and benefits directly to HMRC via a ‘PSA submission’ rather than using the employee form P11D. In order to do this, the company agrees to pay the Income Tax and National Insurance contributions on the agreed expenses and benefits on behalf of its employees.
So a PSA allows certain benefits not to be reported via a form P11D, but through a different agreement with HMRC. However, it comes at an additional cost to the company: by way of paying the tax due on behalf of the employees (which means the tax charge will be grossed up to allow for the fact that the company paying the tax is a taxable benefit in itself) and a higher NIC cost for the company.
What can be included in a PSA?
Not all expenses and benefits can be reported on a PSA. It is only intended for minor, irregular or impracticable expenses or benefits that are provided to employees.
Examples of minor benefits and expenses include: taxable incentive awards (such as a long-service gift or ‘employee of the month’ vouchers), telephone bills, small gifts and vouchers not covered by the trivial benefit exemption, or taxable staff entertainment (see below). Irregular expenses and benefits cover things like relocation expenses over £8,000, the expense of a spouse accompanying an employee on an overseas business trip, or the use of a company-owned flat.
The final type of expense or benefit that can be included is one where it’s impractical for the employer to determine the cost for a specific employee. This includes taxable staff entertainment (see more below), use of a shared car, or the expense of some in-office beauty treatments (that not all employees use).
This is not an exhaustive list, and you can ask to include anything which qualifies as either a minor, irregular or impractical benefit or expense.
Staff entertainment tax rules
Staff entertainment is one of the main items companies report on a PSA butut what should be reported as taxable staff entertainment is often more wide reaching than many realise.
When asked what staff entertainment expenses a company incurs each year, most people immediately identify a big, all-employee event (usually a Christmas or summer party) as the only entertainment they provide for staff. Such parties are of course a form of staff entertainment and only taxable if the annual staff event exemption doesn’t apply.
What many overlook is that, throughout the year, there is often a lot more ad hoc staff entertainment provided and paid for via the employee expense system. The cost of team building events, team lunches, coffees when a manager conducts an employee’s appraisal off site, a directors’ dinner (or even a round of drinks a manager buys for the team in the local pub on a warm Friday in July) are all considered a form of staff entertainment.
Some companies assume that such expenses are an allowable business expense. This might be because the staff were discussing work, or because the cost benefitted the company by the team working together better. Unfortunately, this is an incorrect assumption and there are no exemptions for expenses such as these.
The alternative to a PSA
Without a PSA, the benefit of such ad hoc staff entertainment should be reported on an employee’s annual P11D. To do this correctly, a company would need to know exactly what benefit each employee received. The amount of work required to do this even for a company of few employees, is almost unimaginable (so did Neil from finance have two pints and a burger but no chips but Gemma only had a salad with a dessert and a soft drink? – the mind boggles).
Should you consider a PSA?
Companies that do not report benefits such as Neil’s two pints and a burger on his P11D are technically not compliant with their employment tax obligations and could face penalties should HMRC investigate and discover this.
With compliance almost impossible and non-compliance a risk for the business, companies may feel stuck between a rock and a hard place. PSAs do offer a means of avoiding this undesirable situation. Reporting those expenses which can be included via a PSA requires much less work and allows the company to fulfil its employment tax obligations. Despite the additional cost, it is likely to be less than the tangible and intangible costs it risks from continuing to do things in a non-compliant way.
So are PSAs worth signing up for if your company does not already have one? In my opinion and experience, absolutely. Yes, signing up for a PSA will mean some extra work and cost but the benefits, specifically the value HMRC places on them, far outweigh that cost.
If you do not currently have a PSA agreed with HMRC, you have until 6 July 2023 to request one. This will apply retrospectively for the 2022/23 tax year.
If you would like to discuss anything about PSAs, new or existing ones, please contact Dan Kelly.