From April 2027, employers will be required to process some of the more common types of benefit in kind through the payroll. We explain what is changing and what employers can do now to prepare.

Host

Stephen Relf, Tax Technical Manager, ICAEW

Guests

• Katherine Ford, Tax Technical Manager, ICAEW
• Adelle Greenwood, Tax Technical Manager, ICAEW

Producer

Ed Adams

Series Lead

Mark Rowland

Transcript

Stephen Relf: Hello and welcome to The Tax Track, the podcast series from ICAEW, exploring the latest developments in the world of tax. HMRC's latest figures show that a record amount of capital gains tax, £24.2 billion, was paid for the tax year 2024/25. In this episode, we will get behind those figures explaining why CGT receipts are increasing and we'll also explore some of the more challenging areas in CGT including crypto assets.

[Teaser audio] Katherine Ford: There is an assumption that they are treated like cash and are therefore exempt from tax, but that's not the case. So any disposals come within the CGT rules.

SR: And we'll look ahead to the start of mandatory payrolling of benefits in kind. There are now just six months to go until employers are required to process some types of benefits through the payroll. We'll explain what employers can do now to prepare for the significant changes ahead.

[Teaser audio] Adelle Greenwood: Employers can start now by reviewing their benefits programmes as well as their internal timeframes and data gathering processes to ensure readiness.

SR: I'm Stephen Relf, a Tax Technical Manager at ICAEW. Today I'm joined by regular guests, Katherine Ford and Adelle Greenwood. Both Katherine and Adelle are managers in the institute's tax team with Katherine specialising in personal taxes and Adelle in employment taxes. Welcome back to the tax track, Katherine and Adelle.

KF: Thanks Stephen.

AG: Hi Stephen.

SR: Thanks for being here, both of you. So Katherine, let's begin by talking about CGT. Now we have seen a lot of changes made to CGT in recent years, in particular to the annual exempt amount and we are starting to see the effects of those changes come through now. Could you start us off please by just explaining briefly what the annual exempt amount is and what changes have been made to it?

KF: Of course. So the annual exempt amount is an individual's tax-free CGT allowance back in the year 2022/23. That was set at £12,300. It then got reduced the following year to £6,000 and ever since 6th of April, 2024, we've been down to £3000. So it's been quartered in that time.

SR: So that is quite a significant change to what is a very important allowance. At the time when that was announced, it was expected to increase CGT liabilities and also to bring more people within scope of CGT. Has that proven to be the case?

KF: It is a complicated picture because the reduction in the annual exempt allowance was not the only change that was made to capital gains tax. But we do know from the latest statistics that the receipts have increased significantly in 2024/25. The total CGT liabilities were £24.2 billion, which compared to 21/22— so within three years, that's an increase of £7.1 billion in extra capital gains tax liabilities. We also know that there's been a huge increase in the number of taxpayers in that period who've paid CGT, so up by 172,000 to 551,000 taxpayers, and the figures indicate that up to 163,000 of those taxpayers, so all but 9,000 were brought into the scope of CGT by the reductions in the annual exempt amount. We also did have changes though in the October 24 budget where the basic rate of CGT was increased from 10% to 18%, and the higher rate went up from 20% to 24%. There were also changes from the 6th of April 25 where the business asset disposal relief rate increased from 10% to 14%. So it's likely that some taxpayers accelerated their disposals prior to the 6th of April to take advantage of the lower rate.

SR: So as you say, it's a very complicated picture with an awful lot of changes happening at the same time. But those stats are very interesting, aren't they? I think what stands out for me is we have more people, many more people having to engage with CGT and that can present challenges as some areas can be quite complicated. For example, crypto that's particularly complicated when it comes to CGT.

KF: It is, and there's probably still an element of knowledge gap amongst advisors as well. So for the first time on the 24/25 tax returns, we had new boxes added specifically for the CGT pages for crypto asset disposals. Previously, they were just reported in other assets, and we know from the latest statistics that in that year, 17,600 taxpayers excluding trusts did report crypto asset disposals, and the gains totaled £1.38 billion. So it's a big increase in the reporting.

SR: Yeah, quite a big population of taxpayers than who may be within school because of crypto assets.

KF: Exactly.

SR: At the same time, HMRC is increasing its focus on crypto assets. So we have the crypto asset reporting framework, which came into effect in January this year with HMRC, starting to receive more information going forward. As I said, it can be quite challenging to apply longstanding tax rules to what is a very new type of asset. HMRC have helpfully provided us with a list of common errors, which we're working up into a tax line article. But I thought it'd be useful, Katherine, to run through some of the key principles I come up with. First of all, how do you go about identifying a disposal when it comes to CGT and crypto assets?

KF: So I think there is an assumption potentially amongst agents, but also people holding crypto assets that they are treated like cash and are therefore exempt from tax, but that's not the case. Individuals will almost never be trading in crypto assets. It's virtually impossible to be trading in crypto assets. So any disposals will come within the CGT rules and if you look at the basics of CGT as to what a disposal is, that can include selling tokens for money. So real world or fiat currency, exchanging one type of token for a different one, using tokens to pay for goods or services or giving away tokens to another person unless it's a gift to your spouse or civil partner.

SR: I think we're probably all familiar with the situations of which it can be a disposal. You mentioned that exchanging tokens for a different type of token. I think of the ones you mentioned, that's probably the one that stands out where maybe people wouldn't appreciate that's the case?

KF: Yeah, and you've got to be on top of the tracking of it. So, there was a recent one to many nudge letter exercise that HMRC sent letters to wealthy taxpayers and they gave examples of exchanging Bitcoin for Ether or using Bitcoin to pay for a non fungible token. Now the key point here is you can't use the share for share exchange rules because crypto assets are not shares in the legal sense. So you have a disposal even though no cash has been received on the exchange. So potentially what we call a 'dry tax charge'. A tax charge, but no cash to pay it.

SR: Yeah, and I think that will surprise quite a few people. Because as you say, you haven't received the funds in. Also I think HMRC have highlighted some errors when it comes to calculating the gains on crypto assets. Could you chat us through that?

KF: Of course. So the key thing here is that individuals have to apply the CGT share pooling rules. When you are calculating your gains and losses on crypto assets that are fungible such as Bitcoin. So a fungible asset is basically an asset that is the same as and can't be distinguished from another asset of the same class. So if you think of the old box of widgets and you add some more widgets to it, you don't know which were the original widgets and which were the later additions. So it's the same with crypto assets. So you've got matching rules that you need to apply in the following order, which is acquisitions made on the same day, acquisitions made within 30 days of a disposal, which is on a first in first out basis, and then acquisitions just held in the pool. Where an individual holds the same type of crypto asset, but across different platforms, all transactions have to be included in that one pot when you are calculating it, even if they're on different platforms. So people with multiple platforms, it can be a lot to track all their transactions. There is some detailed guidance in HMCs crypto manual, including examples.

SR: Yeah, those examples are quite important as well, aren't they? Quite useful. These rules are quite difficult to apply in more situations, but dealing with something like crypto assets...

KF: Particularly the volume of transactions as well. There may be some software out there that can help with it, but you'd need to check that it does it correctly.

SR: Now our focus today is on CGT, but it's important to note that other taxes come into play with crypto assets. Inheritance tax, Katherine, I know that's another area you look at and I believe that's a problem for crypto assets?

KF: It is. So again, we've had another one too many nudge letter campaigns to agents reminding them that crypto assets are property for the purposes of inheritance tax. That can lead to errors in filing of IHT returns or the non-filing of IHT returns if you think you are an accepted estate. So HMRC have written to agents who have previously submitted IHT returns to help improve agents' knowledge in this area. The one thing we don't have at the moment is a separate crypto asset box on the inheritance tax return as they've done for the CGT pages, but we might get that as part of the IHT digitalisation. That's due to start next year.

SR: So returning then to CGT while we've got you here today, I just wanted to mention 60 day reporting of residential property. Now we've talked about that a lot in the past and it has caused issues in the past, interested in hearing if it's still causing issues and what they are. But could you just start us off by giving us a quick overview of what 60 day reporting is and what it involves?

KF: So if you are a UK resident individual and you dispose of a UK residential property and you make a gain on it and have some capital gains tax to pay, you have to do an online report within 60 days of the sale of the property. That's via the HMRC service that's called CGT on UK property. There is no need to report though if there's no CGT liability. So if any gain is fully covered by your annual exemption, private residence relief or other reliefs or capital losses. There is also a similar reporting obligation where a non-UK resident individual sells any UK property or land. So not just residential or they sell an interest in a what's called a property rich company. That's regardless of whether or not a gain arises or there's no tax to pay. So there's two slightly different reporting requirements depending on whether you are a UK resident or not. The statistics that we have from for 24/25 show that around 84% of residential property disposals are reported through the CGT on UK property service. But for the reasons explained above, not all will be reportable. So some will be exempt, but some within that there will be returns that have been missed.

SR: So the rules are quite complicated, but they are quite well established. Now, are people familiar with them or are there still particular challenges in applying them?

KF: There are definitely still challenges. If the taxpayer is already doing a self-assessment tax return, then you have to check if they've made any CGT property disposals that have already been reported and where the tax has been paid or what's called the real time transaction return, which is what you can use to report other disposals, so including the crypto. You have to then also put that disposal on the tax return again and show what tax has already been paid on it to work out what the balance of the tax due is at the end of the year. Failure to do this could lead to complications. For example, you could pay tax twice on the same gain if you don't, for example, put the credit on that you've already paid the tax for. So we are covering this in an article which will also cover the real time transaction returns.

Mandatory payrolling of benefits in kind

SR: Yeah, thank you Katherine. Now you mentioned an article there, there are a few articles that we've written of late on CGT. We'll include links to those in the show notes. Also worth pointing out that eligible ICAEW members have access to Blooms Street's accounting and tax service. From the 1st of September there is a book on their crypto asset taxation, which I think will be a really useful resource. Okay, so now turning to Adelle and mandatory payrolling of benefits in kind. Now Adelle, as I mentioned at the beginning, I think there are just six months to go until businesses have to start a mandatory payrolling of benefit and kind. So this is a great time isn't it, to start thinking about it and beginning to prepare. But before we get into some tips for employers and agents, could you just run us through what is actually going to change from April?

AG: Yeah, so it's going to become mandatory for employers to process certain benefits via the payroll from April, 2027. Benefits in kind are non-cash benefits such as cars, loans, and private medical insurance. Currently benefits can be payrolled on a voluntary basis, but several employers still use the P11D and P11D forms to report benefits at the end of the tax year. The taxes are then collected via the employee's tax code or via the self-assessment tax return. The Class 1A National Insurance. So the employer's obligation is paid after the end of the tax year. Under the mandatory scheme tax and national insurance, including the Class 1A, will be due on a real time basis throughout the tax year.

SR: So this is quite a significant change. One, because obviously the processes are changing quite a lot, but also it affects pretty much all employers, everyone who provides benefits. So it's something that really employers want to be on top of ahead of April. Now, as I said, it does start in April, but it's not that simple, is it, Adelle? Because some benefits come later. Could you talk us through the phased approach to this?

AG: Yeah, that's correct. So in June of this year, HMRC announced that the mandatory payroll will be introduced using a phased approach. So phase 1 will be payrolling of company cars and car fuel vans and van fuel and medical and dental benefits. That will be from the 6th of April, 2027. Then phase 2 will be most other taxable benefits, which will be from the 6th of April, 2028. There is going to be an ongoing exception for loans and accommodation and that's due to the way the taxable value is calculated, but these may also become mandatory in time.

SR: So we have been on somewhat of a journey with this policy. It was announced back in January, 2024 and we've had a number of changes made to it since then. Are we happy with where it is now?

AG: Yeah. So there've always been concerns about the timescale since this initiative was announced, as you say, back in January, 2024. It was originally supposed to come in from 6th of April, 2026. So it's already been delayed for one year. The new phased approach, which was announced in June, 2026 gives everybody, so employers, payroll providers, software providers, and HMRC, more time to prepare. HMRC has also confirmed that they've reduced the number of data reporting fields that will be required in under real time reporting. So that significantly reduces the additional data gathering requirements that employers were going to face. The phasing means that efforts can be concentrated on the most common benefits. It's actually going to mean that the majority of benefits will be payrolled from 2027 because these are the high volume and the popular benefits that most employers use.

SR: So it sounds like some sensible changes have been made and have been made in response to engagement, which is really positive for a policy of this magnitude?

AG: Yeah, exactly.

SR: So it is important that employers prepare for this and clearly agents have a role in helping them to do that. But where should employers begin?

AG: So there's going to be obligations for all employers, even those who already currently have voluntary payroll benefits. Because the system and the requirements will be different. Full HMRC guidance is expected to be issued in early November, but employers can start now by reviewing their benefits programmes reviewing what benefits they currently pay, rather what benefits they currently report via the P11D system as well as their internal timeframes and data gathering process' to ensure readiness. HMRC will be engaging in a large communication exercise to employers and payroll providers and agents in order to help with this.

SR: And I guess once employers have understood what the changes mean for them, they can then move on to what they need to do about them?

AG: Yeah, so employers could start speaking with benefit providers and payroll services to agree to any changes they might need to their timeframes, to their contracts or to their processes. For example, the value of some benefits won't be available at the start of the tax year. So steps will need to be taken to determine what estimated value to use, when to review and update this, and how to manage leavers and joiners during the year. Employers might also want to consider their budget for Class 1A and their cashflow because they're likely still to be fulfilling their 26/27 Class 1A National Insurance liability whilst also paying the 27/28 liability on a real time basis.

SR: That's a very important point then, isn't it? Because it's going to feel like they're paying twice in that first year.

AG: Yeah, well they might well be paying double for that year.

SR: So that's employers. But obviously the other side of the coin is employees and I guess employers are probably more likely to be on top of this than employees will be aware of it. Do employers have a role here as well then to educate employees?

AG: Yeah, we definitely think so. Like the employers, some employees will also end up paying tax for two years worth of benefits at the same time. That's quite difficult to explain to employees because they'll be paying tax on a prior benefit via the tax code and the current year by benefit via the payroll. They sound like the same process, but they're actually, they're different. So employees will need to be ready to clarify this to employees and to explain or signpost them where to go for further information.

SR: So potentially quite a drag on employers' time post April in terms of putting these processes into place and then having to engage with employees as well.

AG: Yeah, I think employers need to be ready for lots of questions from their employee populations.

SR: Obviously you are quite close to this. Are there any areas that you think could be particularly challenging for employers?

AG: So we think it's going to be really difficult to enforce real time payrolling on globally mobile populations. So by that we mean employees who are working temporarily in another country or regularly between two different countries and receiving benefits from a different country to the one that they're working in. So employers of these populations are already dealing with the interaction of two or more different tax schemes and different deadlines and simply gathering the data required from different locations makes doing payrolling on a real time basis quite difficult. But last week, HMRC did announce that there will be an exemption available for these populations with more guidance on the exact criteria and process to come.

SR: So the conversation we're having today about this reminds me a little bit of where we were this time last year on MTD. So an awful lot of challenges, a lot of things to prepare for, but at least there we had the benefit of the soft landing on penalties. Because clearly it's going to be a learning curve here. Is there anything similar for mandatory pay rulings?

AG: Yeah, so there is also going to be a soft landing for mandatory payroll rolling and benefits. So there will be no additional penalty for inaccuracies relating to mandatory pay rolling of benefits in 27/ 28 unless it's considered to be deliberate error. However, the usual realtime information and PAYE penalties will still apply as well as late payment interest.

SR: As we said at the top, we're six months away now from the start, what's going to happen in the next six months from ICAEW's perspective?

AG: So HMRC due to issue more guidance after the budget in November, there won't be any registration required for employers for the mandatory phase 1 benefit. So it will be automatic for all employers, but those employers who currently payroll, other benefits other than the phase 1 will be assumed that they want to continue to payroll those unless they opt out. But there's also a voluntary registration scheme for other employers who already want to payroll phase 2 or loans and accommodation. That will be open from November until the 5th of April, 2027. Then we should also have more clarity on the exceptions process for the globally mobile employees around the same time.

SR: That's brilliant. Thank you very much Adelle. So clearly a very important topic for employers and want to make sure you keep up to date on and we will be returning to this in articles, and on the podcast again, no doubt. Thank you very much, Adelle. Thanks Katherine and Adelle for your contributions.

KF: Thank you.

AG: Thanks Stephen.

SR: Thank you for listening. All of the topics we've discussed today are covered in more depth in the articles linked in the show notes. If you found this useful, then don't forget to subscribe so you never miss an episode. You can rate and share the podcast too. We'll be back next month with the next Tax Track. In the meantime, why not check out the sister podcast from ICAEW? Accountancy Insights provides business finance and accountancy analysis while each episode of Behind the Numbers offers a deep dive into a selected topic. There's also the Students' podcast aimed at young professionals to keep up with the latest developments in tax. Please make sure to subscribe to our weekly TAXwire newsletter. Tax faculty members also have access to our in-depth tax line articles. Thank you for listening.