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Contractor guide to the P11D - declaring benefits and expenses

Contractors required to complete a P11D do so primarily to provide HMRC with details of the contractor’s non-cash income arising from employment, such as benefits and expenses. HMRC uses its copy of an employee’s P11D to cross-reference against tax returns, while the employee uses the P11D to transfer the details across to their tax return.

Derek Kelly, managing director of contractor accountant ClearSky Accounting, explains: “Apart from the tax return, a P11D is the only mechanism that HMRC can use to receive reports of an employee’s non-salaried income, plus items like reimbursed expenses that do not attract a tax liability.

“They are used because ‘employed’ contractors – such as those working for contractor umbrella companies or who are employees of their own limited company – do not always know the value of certain items, such as private medical insurance, or may not have declared everything relevant in their tax returns.”

Who completes a P11D, and when?

“Employers complete the P11D, which for most limited company contractors means their accountant will prepare the form based on the year’s financial records, and then ask the contractor to check and sign it,” continues Kelly. Exactly who does what depends on the level of service a contractor has bought into from their contractor accountant.

As for umbrella company contractors, they will receive their P11D from their umbrella company, unless the umbrella has a dispensation granted by HMRC.

As with most HMRC forms, getting them in on time is essential. “The P11D covers income, benefits and expenses reimbursed for a full financial year from 6 April to 5 April the following year and must be submitted to HMRC by 6 July,” says Kelly.

“There are two forms produced by employers: the P11D, which is given to the employee; and the P11D(b), which is provided by the employer to HMRC and details any class A National Insurance Contributions (NICs) due on any benefits and a declaration that the forms have been completed correctly. Limited company contractors, or their accountants, will complete both forms.”

What’s included on the P11D

Contractors will typically make up to three monthly payments into their personal bank account from the business one. These will be for for salary up to the tax-free allowance, possibly dividend payments, and then for reimbursement of business expenses. It’s the third category that must be declared on the P11D.

The P11D covers income, benefits and expenses reimbursed for a full financial year from 6 April to 5 April the following year and must be submitted to HMRC by 6 July

Derek Kelly, ClearSky

“Contractors who pay for any business expenses out of their own pocket, which the company then reimburses, have to declare the expenses alongside any benefits, such as a company car or private medical insurance,” explains Kelly. “Take, for example, a limited company contractor who has paid for £200 worth of travel expenses out of their own pocket and then reimbursed themselves from the company bank account. Their accountant will show £200 on the P11D as having been paid to the contractor as reimbursement of expenses with no tax liability.” An umbrella company contractor would receive the form direct from their umbrella company, usually completed by the umbrella’s finance team.

Expenses charged to a company credit card and paid directly by the contractor limited company would not appear on the P11D, nor would any payments for expenses made direct by the limited company, say by paying a hotel invoice with a company cheque.

What if there are no expenses or benefits?

Although rare, there are some contractors who take no expenses or benefits of any kind from the limited company. However, every company is required to either file a P11D or confirm to HMRC that no P11D is due

“A sole director who has received no expenses or benefits from their limited company during the year does not have to file a P11D, but they will have to declare on their final RTI submission for the year that no P11D is due,” highlights Kelly.

“Contractors should always double check that they have not received any benefits.” He adds. “For example, often overlooked is the contractor’s personal self assessment tax return. Although there may be no expenses claimed during the year, if the cost of completing a contractor’s personal tax return is paid for by their company, then this is a benefit and a P11D must be filed.”

Dispelling the myths surrounding dispensations

Many contractor service providers use dispensations as a marketing tool, claiming that contractors don’t need to keep receipts of expenses. But, as Kelly explains, this is not what a dispensation means at all.

“A dispensation from HMRC relieves the need for an employer to produce individual P11Ds for every employee simply to account for the reimbursement of expenses where there is no tax to pay; this can cut admin for the employer hugely. But individual contractors still need to keep all their receipts”

So, can a contractor limited company apply for a similar dispensation? Sadly not, says Kelly. “Dispensations are only granted to businesses that can demonstrate some form of audit oversight; in a larger company, that means a worker typically gets a line manager to check and sign off their expenses. But with many contractor limited companies, there are only one or two directors, which disqualifies them from being granted dispensations.”

What can go wrong with P11Ds

Kelly warns contractors that the penalties for completing an incorrect P11D are steep. Problems mostly commonly occur either because a contractor is trying to put a dubious expense through as a business cost, or because they have forgotten to include a genuine expense.

“Better to be late than wrong,” he says. “Each incorrect P11D costs employers £3,000, whereas forms that arrive late cost £300 each. HMRC historically has not issued fines as often as they could have, but this is likely to change as HMRC seeks additional revenues from as many sources as it can.” Each late or incorrect employer’s form, the P11D(b), will cost £100 for each group of 50 employees, and any errors in NIC calculations will cost the employer the difference of the correct amount versus the amount declared in error.

“HMRC has held consultations about replacing the information provided in P11Ds with payroll benefit items,” says Kelly. “But P11Ds continue to provide HMRC with key information about contractor expenses and benefits and so are likely to be with us for some time yet.”

Published: Saturday, 22 May 2010

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