Disclaimer: This is not legal, accounting, or tax advice - it's simply a guide. If you need help, check with your accountant or contact HMRC directly.
Benefit in kind: how to track & calculate for British & Irish companies
Patrick Whatman
Published on April 24, 2024
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The corporate tax code is full of quirks, exceptions, and need-to-knows. Benefits in kind (BIK) are one of these.
For tax purposes, they force you to consider whether your company’s perks go from having a business purpose, to giving a real monetary advantage to certain employees. If so, they’re really no different from a salary, and the tax collector may want to speak to you.
This article unpacks the most important features of the BIK tax setup, with a particular highlight on the company car - perhaps the most common example of this benefit.
We’ll explore how to identify a benefit in kind, how to calculate your BIK rate, and what this all means for finance teams.
What is a benefit in kind?
Benefits in kind are perks, benefits, or other goods offered to employees (or discounted) that aren’t part of their salary. Broadly speaking, if these advantages provide similar value to employees as wages, they should be taxed.
For HMRC or Revenue (the Irish tax authority), these perks might give companies and employees a way to avoid paying income tax, even where the benefit clearly provides monetary value. Thus, this specific expense category exists.
As with all things tax, there are exceptions and specific rules to be aware of. We’ll detail these in this post.
Your responsibilities
If you offer employees a benefit in kind (see below for examples), you must:
Report it to HMRC
Pay tax and National Insurance (NI)
In many cases these payments are processed as part of payroll. If so, you do not need to declare them separately.
Otherwise you must declare them online at the end of the year.
Technically, taxes are paid by your employees as these benefits are part of their compensation package. You need to clearly distinguish between benefits in kind and other forms of business expenses. The former should be processed with payroll, while the latter entitles you to tax relief.
But if you (and your employees) fail to correctly pay benefit in kind tax, you’ll need to make this right in your corporate tax filings.
Examples
These common benefits in kind will typically require the company or employee to pay tax:
A company car when used privately outside of work. (Business travel expenses are otherwise tax free.)
Assets such as televisions, computers, and bicycles which have a clear personal use outside work hours.
Private medical insurance, when provided by the company.
Home or mobile phones which also have a personal use.
Non-business travel expenses. (The portions of trips which are strictly work related will be tax free, but any personal travel paid for by the company is a BIK.)
Non-business entertainment expenses.
Meal vouchers or canteen meals provided to just some employees. (If the office has a canteen and provides meals to all staff, this is not a taxable benefit in kind. Vouchers and meals outside the office are always a BIK.)
HMRC’s rules for benefits in kind
Here’s the process to report BIKs to HMRC:
If you report expenses through your payroll software, you do not need a separate process for benefits in kind. Simply report them as part of the PAYE.
If you do not report employee expenses through payroll, you must file at the end of the tax year. This is done via a P11D form.
Under either scenario above, you must also declare and pay Class 1a National Insurance at the end of the year. Use the P11D(b) form.
All submissions must be made online. Paper forms are not accepted.
To submit your P11D or P11D(b) form, you have two options:
Companies with fewer than 500 staff can use HMRC’s PAYE Online service.
Companies with more than 500 should use their existing payroll software.
Revenue’s rules for BIKs in Ireland
Under the Irish rules, employees whose taxable income (including benefits) is above €1,905 in any year must pay tax on benefits. So the threshold is very low.
The same is true if benefits are provided to spouses or family members of employees - tax is owed in this case.
Ireland does have a “Small Benefit Exemption,” which lets you give employees benefits each year, tax free. The rules for these are fairly clear:
You can offer up to two benefits per employee, per year.
The total value of one or both cannot exceed €1,000.
If the value exceeds €1,000, these benefits will be subject to tax.
Estimating benefits in kind
In some cases, the value of the benefit will be obvious: if you pay an employee’s private health insurance premium, you know how much you’ve paid. Therefore, you must calculate tax based on the value of that benefit.
But in many cases, it’s not as clear.
In Ireland, Revenue provides a relatively simple rule. The value of a benefit is whichever is higher between:
Your cost in providing the benefit, or
The benefit’s market value (when converted to a cash equivalent)
If the employee contributes to the costs or repays the company from them, this amount is deducted from the benefit’s value.
Market value
As above, the taxable amount will always be the highest between a benefit’s market value and the cost you incurred to provide it. For example, if you manufacture goods and then provide these to employees as benefits in kind, the taxable amount is the market value, not the cost to produce them.
If you give employees a second-hand or depreciated asset, you can use its market value on the day of the gift - the value after depreciation.
Deep dive: company car tax
This is probably the most classic (and potentially confusing) example of a benefit in kind. A company car given to an employee has a clear business purpose (not subject to tax), but also a private use (benefit in kind).
You know the cost and value of the car, but not necessarily the added value for the employee. You need to find the “cash equivalent" of the employee’s private use of the car.
For car benefits, HMRC and Revenue provide specific tax bands based on the kilometres travelled, the car’s “open market value” (OMV), and its CO2 emissions profile. But this calculation isn’t necessarily easy.
Here’s how Revenue calculates the cash equivalent (value of the benefit):
1. Calculate the open market value
This is the list price of the company car before its first registration, including VAT and Vehicle Registration Tax (VRT).
This also applies to second-hand car purchases
The “first registration” includes where a car was registered overseas and imported. You use the value of the car on the date it was registered, even if was delivered to you later.
If you received a discount, you can use the (reasonable) discounted price as the OMV. Revenue states that vehicle discounts (even when purchasing a fleet) are rarely more than 10%. If you received a discount higher than this and want to reduce the OMV of these vehicles, either use 10% or check with the Revenue Office in advance.
2. Find the category of vehicle
Ireland, HMRC, and the EU use categories to classify vehicles for VRT. Here’s the Irish list for reference.
The vehicle category depends on its CO2 emissions:
A: 0-59g/km
B: >59g/km to 99g/km
C: >99g/km to 139g/km
D: >139g/km to 179g/km
E: >179g/km
You need the correct category for the company vehicle to get the tax amount.
3. Calculate the cash equivalent
This step actually involves multiple stapes. (Note: This is for A, B, C, and D. There’s another process for category E vehicles.)
Deduct €10,000 from the OMV.
Multiply this value by the vehicle category percentage in the table below:
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Source: Revenue.ie
So for a €25,000 with 75g/km in CO2 emissions, doing 40,000km in business mileage, the calculation would look like this:
(€25,000 - €10,000) x 0.1575 = €2,362.50. This is the cash equivalent of the value gained by the employee.
Note: if the employee contributes to the maintenance or running costs of the car, deduct this from the cash equivalent.
Takeaway: categorise costs carefully
The rules around benefits and their tax treatment are full of interesting exceptions, edge cases, and grey area. Finance teams must keep a clear record of each type of benefit or expense, the date it was incurred, by whom, and why.
And the easily you can do this, the better. That means avoiding complex spreadsheets, categorising costs one by one, and going through the tax code at the end of every year just to stay out of trouble.
The simple answer: software. Get tools to track and categorise for you, so you can focus on more value-adding work.
A spend management solution like Spendesk is the perfect place to start.
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