Employers often incur costs in relation to staff entertainment and rewards for employees, which are considered taxable benefits in kind (BIK). HMRC are actively undertaking employer compliance reviews of businesses and are assessing whether these types of benefit have been identified and correctly reported. Our employment tax team explains how you can report these benefits.
What is a PAYE Settlement Agreement?
Employers can enter into a PAYE Settlement Agreement (PSA) with HMRC, which is an enduring voluntary agreement that allows the employer to bear the tax and Class 1B (employer only) NIC on specific non-cash taxable benefits provided to their employees.
The calculation of tax and Employer Class 1B NIC on these benefits is submitted to HMRC on an annual basis following the end of the tax year. The tax liability is calculated on a grossed-up basis in recognition that the employer is meeting the tax liability for the employee, with employers Class 1B NIC also being due on the gross amount.
Rules surrounding PAYE Settlement Agreements
The benefits allowed on the company’s PSA must be pre-agreed with HMRC and can only be minor, irregular or impracticable to tax via PAYE/P11D returns. In addition, cash payments are never allowed to be included within a PSA.
What is included in a PAYE Settlement Agreement?
Detailed below are typical items that can be included on a PSA:
- Events where the annual events exemption conditions are not met, either because they exceed the concession monetary limits or because they are related to the performance of the company (i.e. a well done, thank you or work anniversary event) or they are not available to all employees on the same basis.
- Any gifts that link to employment, i.e. gifts to employees for passing their probation or exams.
- Any recognition or thank you awards during the year, i.e. employee of the month.
- Flowers, meals, food, drinks or gifts for teams or individual employees as a gesture of thanks or gratitude.
- Meals for meetings between employees and directors that HMRC consider have been provided as part of a thank you rather than as a requirement for the meeting, particularly where the meeting is held off-site.
- Long Service Awards (LSAs) below 20 years of service and/or LSAs that are provided less than 10 years apart.
- Leaving or retirement gifts provided to an employee and funded by the employer.
What is the benefit of having a PAYE Settlement Agreement?
HMRC consider that most employers undertake some of the activities listed above and would therefore typically expect a PSA to be in place. Having a PSA demonstrates to HMRC that the company has good governance and strong processes in place to identify these items and is recognising the tax liability arising on minor benefits provided.
PAYE Settlement Agreement deadlines
PSAs must be agreed with HMRC no later than 5th July following the end of the relevant tax year. The deadline for the 2023/24 tax year is 5th July 2024. HMRC request for the calculations to be submitted by 31st July following the end of the relevant tax year with electronic payment due by 22nd October following the end of the relevant tax year. If you have identified that you have costs suitable for inclusion on a PSA, we recommend an agreement is entered into as soon as possible.
Stay compliant with specialist employment tax support
Our employment tax team can assist you in setting up an enduring PSA with HMRC, calculating the tax and NIC liabilities for the tax year and submitting the calculations to HMRC. If you require assistance, please do not hesitate to contact us today for further information.
