What is a pecuniary liability and what is the relevance of such a liability to Income Tax and National Insurance Contributions (NIC)?
A pecuniary liability occurs when an employer pays a bill or a debt for goods or services that is in law the liability of the employer. Examples will be where the employer pays the telephone bill of the employee, the contract for the provision of the telephone is between the telephone company and the employee.
However there are different rules for accounting for tax and NIC.
If the employer contracts with and pays the supplier of the goods or services directly, this is a benefit in kind and is reported at the end of the tax year on form P11D.
However what if the employer reimburses the employee for the goods or services. As the employee has received the payment direct from the employer, this counts as pay for tax and National Insurance Contributions. To ensure the correct amount of tax and NIC is paid, the amount given to the employee must be ‘grossed up’ and processed through the payroll.
Why are the two scenarios treated differently?
If the employer gives the employee the cash, they are not discharging a debt, they are paying cash earnings to the employee. The employee would ordinarily be expected to pay for their own personal bills from their net pay.
National Insurance Contributions
If the employer reimburses the employee the NIC treatment follows that of the income tax (see above). However if the employer contracts with and pays the supplier directly, a benefit in kind, the employer must account for Class 1A NIC (employers NIC) on the benefit in kind. There is only a NIC liability for the employer, not the employee.
One final complication. Let’s say that the employer settles the employees own personal mobile telephone bill but doesn’t account for the payment made through the payroll. Instead the tax is accounted for on form P11D. Tax is not an issue, the tax is paid through the employees’ tax code. But what about NIC?
Class 1A is normally paid on a P11D entry. However this is not possible because the benefit is personal to the employee. Consequently, if the benefit is declared on P11D, as employees and employers NIC is due, the full amount declared on P11D must be processed through the payroll to account for the employees and employers NIC. No tax should be accounted for on payroll in this scenario.
Tax Free Allowances
I am seeing more and more instances where employers are making a round sum payment to employees to cover the business use of an employees’ own mobile telephone or home telephone. The expenses are either processed through the payroll as a non taxed and NIC payment, or are paid to employees through an expenses system.
For an expense to be paid to an employee without deduction of income tax and NIC, it must be made wholly, exclusively and necessarily in the performance of the employees’ duties.
The vast majority of mobile telephone contracts now provide for unlimited calls and texts with internet usage. So if an employee is being reimbursed for business use, is there actually any use that would meet the wholly, exclusively and necessarily criteria. The answer to this is, in the vast majority of cases, no.
The employee has purchased the mobile telephone for themselves, in their own name, there are no additional costs incurred in using that telephone for business use. As such any allowance paid to the employee must be taxed and NIC accounted for.
HMRC are looking for such ‘expenses’ being paid on visits that they make to employers and are recovering large amounts of tax and NIC for failing to process the payments through the payroll. You have been warned!
A solution to the mobile phone conundrum
If the employer provides the mobile telephone and the contract is in the employers’ name, they are no tax consequences, whether there is any business use or not.
For more details and information, or you are considered that you are making tax free allowance payments to employees and don’t know how to resolve the matter, contact Paul Chappell Head of Legislation and Compliance on 03331 123456