With weeks to go before the July 6 deadline for submission of P11D and P9D annual returns, employers' payroll and finance departments will be turning attention to the preparation of these forms.

Many companies are unclear about the kind of information required. Yet with penalties of up to #300 for late submission or #3000 for incorrect returns it is essential to get it right.

What do employers need to know and is there a way to limit the risk of fines?

For employees who earn #8500 per annum or more, and for company directors, the appropriate return is P11D.

Employees whose earnings are below #8500 should have expenses and benefits reported on forms P9D. July 6 is also the last date on which employees should be given either a copy of the relevant form, or full details of those expense payments and benefits which the employer has reported to the Inland Revenue.

There is confusion as to the information which employers are statutorily required to enter on form P11D. The main misconception is that the P11D is simply a return of benefits in kind.

But employers who only report benefits in kind could be guilty of submitting incorrect returns. The P11D is a return of expenses payments either paid to or on behalf of employees, as well as benefits in kind.

A P11D dispensation allows the employer not to enter details of certain expenses on the form. But if no dispensation is held, all expense payments should be reported on the relevant form.

Even those incurred for genuine business reasons and which attract no tax liability. The #3000 penalty for incorrect returns is a maximum and it is unlikely that the full penalty would be levied for errors with no tax consequence. Nonetheless, the cost of failing to fill out returns correctly is too high for any company to ignore.

An initial penalty of #300 can be levied for returns which are submitted late. Thereafter a daily penalty of #60 per day, per return can be charged until the returns are submitted to the Inland Revenue.

Failure to supply P11D or P9D information to employees by the statutory July 6 date carries the same penalty as failure to supply the information to the Revenue.

With wider scope to impose fines for PAYE non-compliance and increasing penalties, it is in every employer's interest to obtain dispensations from the Inland Revenue for as many expense items as possible.

The risk of making incorrect returns and incurring penalties can be greatly reduced if employers have fewer entries to make on the P11D.

Employers should also consider whether to enter into PAYE Settlement Agreements (PSAs) with the Inland Revenue. These allow employers to settle tax on behalf of employees in respect of certain benefits in kind.

Gifts to employees at Christmas and the provision of vouchers are the benefits usually included in PSAs. These would ordinarily have to be reported on forms P11D but where a PSA is in place, no report is required.

PSAs replaced the informal Annual Voluntary Settlement (AVS) arrangements under which employers used to settle tax on benefits provided to employees. Employers could write to the Revenue after the end of a tax year to say they wished to pay tax under an AVS.

PSAs are much more formal arrangements. Employers must advise the Revenue, in advance, which items they wish to include in a PSA. The tax paid under the PSA must be paid no later than October 19 following the end of the tax year to which the PSA relates.

q Patricia Ritchie is the Partner in Charge of Tax for Deloitte & Touche in Scotland.