Are you aware of the changes to dispensations?
In the past, many businesses have applied to HMRC for dispensations. Dispensations have allowed expenses and benefits to be provided to employees without being included on a P11D or subject to PAYE and NIC. A dispensation was only given where HMRC were satisfied that the employee would have been entitled to full tax relief on that payment or benefit.
A change: expenses exemption to replace dispensations
From 6 April 2016 businesses are no longer able to apply for a dispensation and all existing dispensations have come to an end. Instead, a new exemption has been introduced which effectively means that businesses will not have to pay tax and NIC on paid or reimbursed expenses payments or put them on a P11D. The exemption is subject to the condition that the business satisfies itself that the employee would be entitled to full tax relief on that payment or benefit.
The main types of expenses to which the exemption applies are:
- Travel and subsistence expenses
- Fees and subscriptions
- Business entertainment expenses.
All other non-allowable expenses will still be reportable on a P11D and/or subject to PAYE (and possibly NIC). Employees will still be able to claim tax relief in respect of unreimbursed business expenses.
The new exemption does not apply to expenses or benefits provided under a relevant salary sacrifice arrangement. This includes any arrangement where an employee gives up the right to receive earnings in return for tax free expenses payments or where the level of their earnings depends on the amount of any expenses payment.
Consequences of the change
In the past, HMRC were prepared to include some payments in dispensations which were reasonable but perhaps not strictly in accordance with the law. However, this will not be the case going forward.
In addition, tax rules are not simple. For example, HMRC’s guidance on the rules on tax relief for travel and subsistence costs is 70 pages long. If HMRC conducts a compliance visit which determines that some payments are not exempt, the business may be subject to P11D penalties or be responsible for the payment of arrears of tax, NIC, interest and penalties.
As part of these changes, a second option has been introduced, which allows amounts based on scale rates to be paid or reimbursed, instead of the employee’s actual costs. The rates that can be used are either HMRC approved figures or figures specifically agreed with HMRC in writing.
We have linked a downloadable appendix of the HMRC approved figures at the bottom of this article.
These only cover meals purchased by an employee in the course of business travel. If the business wants to pay bespoke rates for other types of expense, it can apply to HMRC for an approval notice, and HMRC have issued a specific form for this purpose here.
Authorised mileage allowance payments (AMAPs) are scale amounts that employers can pay to employees using their own vehicle for business travel. For cars and vans, the scale rate is 45p per mile for up to 10,000 miles in the tax year and 25p per mile above this. AMAPs are a separate statutory regime and therefore continue as before and do not come within the new exemption regime.
Important points to note about scale rates
Employers must operate a system for checking that the employee is incurring and paying amounts in respect of expenses of the same kind and that tax relief would be allowed. HMRC have issued guidance on what checking systems they will expect employers to operate and these are also attached as an appendix.
What to do following the changes to dispensations
The new system means that you may have to change what you have been paying or reimbursing your staff and/or apply to HMRC for new rates. The changes are not simple, so we suggest you review your dispensation as soon as possible and contact us if you are unsure as to how the new rules will affect you.
Listed below are 5 key action points to consider following the changes:
- To review all existing dispensations
- To see if there are any reimbursements in there that are at bespoke rates
- To seek an approval notice for any bespoke rates
- To assess whether the new rules mean that other items in the dispensation will now not be eligible for exemption and to deal with the consequences
- To only return real benefits in kind on P11D in future and to forget all things which are now not required to go on there
- To ensure a checking system is in place
If you would like to discuss any of these changes or would like help with applying to HMRC for new scale rates, please do not hesitate to get in touch with your usual Hawsons contact.
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