Where an employee receives non-cash remuneration, ie benefits-in-kind (BIK), these benefits are subject to tax and the majority are also liable to employer’s Class 1A NIC.
The cash equivalent of the BIK that has tax and NIC applied to it is usually calculated as the cost to the employer of providing the BIK, although in some cases it is calculated in a different way.
‘Making good’ is where an employee gives something (usually a cash payment) to their employer in return for the BIK. Making good has the effect of reducing the cash equivalent of the BIK, often to zero. This then reduces the amount of the employee’s taxable earnings where the payment is made within certain time limits. Where an employee makes a payment for a BIK under salary sacrifice arrangements, however, this does not qualify as a making good payment.
Anna’s employer provides her with living accommodation. The employer rents this from a third party and pays rent of £600 per month. Anna agrees to make a contribution of £200 per month, so the annual taxable BIK is reduced from £7,200 to £4,800.
An employee could choose to make good in relation to most BIK but there are some BIK where making good is more common. These include:
As part of its commitment to simplify the administration of employee benefits and expenses, the government produced a consultation document, ‘Alignment of dates for ‘making good’ on benefits-in-kind’, which closed in early October.
Legislation provides for different dates for making good on different BIK in order to reduce or remove the tax charge. For some BIK there is more than one date for making good in legislation, whilst for others there is no statutory date.
Where an employer voluntarily accounts for the BIK in real time through PAYE (known as ‘payrolled’ BIK) legislation specifies that making good must take place by the end of the tax year for all BIK other than fuel benefit, which is 1st June following the end of the tax year.
Employers, large accountancy firms and representative bodies had told HMRC that the current rules on non-payrolled BIK are causing confusion and want clarity.
The government proposed that making good should take place by the end of the tax year, except for those BIK where there are practical difficulties in doing so. In these cases, it was proposed that making good should take place up to 1st June following the end of the tax year.
|Current rules (non-payrolled BIK)||Current rules (payrolled BIK)||Proposed date|
|Car fuel benefit||End of tax year||1st June following end of tax year||1st June following end of tax year|
|Private use of company car||End of tax year||End of tax year||End of tax year (no change)|
|Van fuel benefit||End of tax year||1st June following end of tax year||1st June following end of tax year|
|Private use of company van||End of tax year||End of tax year||End of tax year (no change)|
|Beneficial loans||No date||Currently no provision to payroll beneficial loans||1st June following end of tax year|
|Credit tokens||When liability becomes final and conclusive||Currently no provision to payroll credit tokens||1st June following end of tax year|
|Other BIK, such as:||When liability becomes final and conclusive||End of tax year, although currently no provision to payroll employer-provided living accommodation and non-cash vouchers||End of tax year|
Following responses to the consultation document, the government acknowledged the difficulty in making good for some BIK by the end of the tax year. However, rather than introduce a number of dates for different BIK it was concluded that there should be a uniform date of 6th July following the end of the tax year, for making good. This is a recognisable date as it is the date by which employers have to submit forms P11D to HMRC.
However, this will not apply to employer-provided loans, where the current provision that allows interest to be paid by the employee within a reasonable period of time will remain undisturbed.
The government is aware of the concerns expressed by employers about the practical difficulties of accounting for NIC within the earnings period but is not persuaded of the case for shifting the NIC liability for non-cash vouchers and credit tokens from Class 1 to Class 1A, the latter being purely paid by the employer.
A Class 1 NIC liability is applied to the payment of a non-cash voucher or use of a credit token only where there is no intention to seek reimbursement from the employee.
There is currently no express provision in NIC legislation for making good and there are no plans to change this.
Legislation will be included in Finance Bill 2017 and guidance will be published in due course to assist employers in implementing and administering the changes.