Employer filing deadline requirements for small businesses

Ahead of the employer filing deadline on 6 July 2006, business and financial advisers Grant Thornton claim that individuals on the minimum wage can be classed as ’higher paid employees’ for companies’ tax filing purposes.

Fiscal drag, whereby increases in tax allowances are outstripped by earnings and thresholds stand still, has forced more employers to file tax returns for employees and has created a growing administrative burden. Employers have to file a P11D form for employees showing expenses and benefits paid to those individuals earning £8,500 or more, as well as for most directors. This threshold was introduced in 1979 and was intended to document the benefits for higher-paid employees. The figure of £8,500 includes the sum of any benefits such as health insurance.

Had the £8,500 threshold increased in line with inflation, it would now be worth over £31,000. However, strikingly, an individual on the minimum wage can be classed as a higher-paid employee for filing purposes.

An individual (over 21 years old) working on the minimum wage (£5.05) for 40 hours a week will earn £10,504 pa (£8,840 pa for individuals aged 18 to21) working on the minimum wage of £4.25).

Clive Fathers, Head of Employer Solutions at Grant Thornton, comments: "It is staggering that someone on the minimum wage falls into the category of a higher-paid employee for reporting purposes. This is another example of fiscal drag, and one which is a very evident example of an unnecessary administrative burden on UK business."

The mooted increase to £5.35 in October 2006 will further test the credibility of the current rules, as an individual working just over 30 hours on the minimum wage will be deemed to be a higher-paid employee.

Fathers continues: "Employees should note that any benefit provided for their family or household will normally count as though it were provided directly for the employee. HM Revenue & Customs (HMRC) can impose a penalty of up to £3,000 per incorrect P11D should any errors be discovered by them, for example, during an Employer Compliance Inspection. The cost of these penalties is not deductible in calculating the company’s liability to corporation tax. If such a review is undertaken, officers have extensive powers to inspect relevant documents and impose interest and 100% penalties for any underpayments."

In addition, the 6 July is the deadline for employers to submit the following forms:

1) P9D - as above, but for employees earning under the £8,500 threshold

2) Information concerning expenses and benefits paid to third party employees

3) Agreement of scope of a PSA (PAYE Settlement Agreement) - an arrangement by the employer to pay tax on small benefits eg. taxi rides, staff parties etc.

4) Return of Termination - if the termination payment is over £30,000 and includes non-cash benefits.

5) Form 42 - reporting transactions in employment-related, restricted or convertible securities. Newly incorporated businesses may be particularly affected as they may be unaware of the requirements. Failure to comply will be costly. Where an individual, who has shares in a company and subsequently becomes a director or employee of that company, the acquisition of shares is reportable to HMRC. A £300 penalty applies for each ’reportable event’ not notified.

In their annual report and accounts for 2004/05, HMRC stated their Large Business Office were targeting higher yields from their work. They also reported that employer compliance yields increased from £281m in 2003/04 to £313m in 2004/05, an increase of 11%.

Fathers concluded, "With the news that the HMRC’s Large Business Office has drawn up a list of the tax compliance levels of large corporates, those with poor compliance records are most at risk. Good housekeeping starts with meeting the relevant deadlines and making full disclosures. Companies that think that sweeping things under the carpet is a solution, can expect greater scrutiny from HMRC."