The End Of Dispensations: A Good Thing?

An employer is required to notify HMRC of all expenses paid to an employee, even if the employee incurs the expense on the employers’ behalf. However, invariably those expenses will not be taxable on the employee, as being incurred ‘in the performance of the duties’ of the employment and ‘wholly, exclusively and necessarily incurred’ (ITEPA 2003, s 336). The important word here is ‘necessarily’, i.e. the expense has to be incurred, the employee having no choice in the matter, as otherwise they would not be able to do the work. So that the employee does not suffer tax on the payment, he is required to submit a counterclaim on his annual tax return.

If it is clear that a particular type of expense will not give rise to any tax charge on the employee (as it is allowable) the employer can apply to HMRC for a ’dispensation’. This saves time and effort all-round, not least for the employer from having to report those expense payments that would otherwise be a matching tax relief claim by the employee.

What has changed?

Finance Act 2015 has implemented new rules such that dispensation claims will be no more after 6 April 2016 The new rules are in ITEPA 2003, s 289A (‘Exemptions: amounts which would otherwise be deductible’).

Under this new legislation a statutory exemption for reimbursed expenses applies, such that reimbursed expenses are not taxable. This means that employers will no longer have to apply for a dispensation, or report those particular expenses on forms P11D. All current dispensations will cease to exist from 5 April 2016. The exemption applies to all employers.

What remains the same?

There are no changes to the rules as to which expenses actually qualify for tax relief. Employers paying non-allowable expenses will still need to put those through the payroll deducting tax and National Insurance contributions (NIC) as usual. Employees will still be able to claim a deduction in respect of non-reimbursed allowable expenses. The system of paying mileage allowances and fuel rates for employees who travel during their work (not home to work) also remains the same. Employees receiving less than these rates can still claim the balance on submission of a tax return.

The new changes will not apply to benefits incurred as part of a relevant salary sacrifice arrangement.

Subsistence expense claims

HMRC publishes a set scale of advisory ‘benchmark’ rate payments that employers can use to reimburse staff for subsistence expenses when they are travelling on business away from their normal workplace (i.e. a meal allowance). These scale rates can be paid to employees without the need to produce the actual receipts for meals. If the employer wishes to use this system, these rates are the maximum that the employer can pay without attracting any tax and NIC liabilities. The employer can pay less than these rates, should they so wish.

‘Benchmark’ scale rates for subsistence payments were historically payable only if a dispensation was obtained, and so the government has had to specifically include provision for such allowances as part of the new exemption rules.

‘Bespoke’ rates including flat rates

Use of such ‘benchmark’ rates is the employers’ choice, but should the employer not wish to use them there is the option to apply to HMRC to agree a different rate. Once agreed, use of the rates is not compulsory but if they are used then they can be so for up to five years before another submission must be made.

In support of the claim, HMRC will expect to be given evidence in the form of a sampling exercise. The evidence needs to prove that the rates being applied is a reasonable estimate of such expenses actually incurred, and that the amount is in excess of the standard ‘benchmark’ scale rates. Should the ‘bespoke’ rate be granted, HMRC will issue an approval notice which may specify certain criteria that will need to be implemented to permit the use of such a payment rate. Payment of any ‘bespoke’ rate without an approval notice will be taxable.

The application for a ‘bespoke’ rate needs to be submitted ‘in such form and manner, and contain such information, as specified by HMRC’(ITEPA 2003, s 289B(6)). Details of what form this will take under the new rules are still to be announced.

As the new exemption will not automatically include any ‘bespoke’ rates, employers who wish to pay or reimburse amounts at a flat rate will also need to apply to HMRC for approval.

Are the changes a good thing?

At first sight, the answer to this question is ‘yes’, as it means less paperwork for all. However, there are some points that lean towards the new rules not being so beneficial.

Example: Compliance

The record keeping requirements will still broadly need to be the same as for those made under a dispensation. It is expected that HMRC will publish model rules showing what will be acceptable in terms of checking expenses and keeping records. As these are likely to be in a standard format employers will need to consider how best to ensure that their reporting methods tie in with HMRC’s requirements.

Dispensations provided certainty that HMRC accepted that no tax or NIC liability arose on all the items covered.

On the assumption that the employers’ records reflected the working practices agreed in the dispensation, then should the employer have been the subject of an employer compliance inspection, it could be more difficult for HMRC to recover retrospective liabilities of tax/NIC on those expenses agreed. This is a valuable protection for the employer that is no longer available.

Practical Tip:

There will be transitional arrangements in place for employers who have previously agreed an arrangement with HMRC for a ‘bespoke’ scale rate within a dispensation since 6 April 2011. Those employers will be able to apply to retain their ‘bespoke’ scale rates without conducting a sampling exercise, those agreements expiring on the fifth anniversary of the rate last being agreed or updated.

Importantly, this application must be made in writing before 5 April 2016. If no application is made, HMRC will treat such ‘bespoke’ scale rates, if used, as round sum allowances and seek to levy tax and NIC thereon.