There have been many important changes being in the budget that haven’t been as well publicised as others. One of these changes that will have a large impact on employers are the changes to the P11D dispensation and associated expenses and benefits legislation.
Since 6th April 2016, business expenses that are deductible by employees are exempt if reimbursed by employers (subject to conditions). In the case of tax-deductible allowances, these and any other bespoke matters now included in dispensations, will need to be covered by new and separate agreements with HMRC (called approval notices).
This means that employers will have to review their agreements with HMRC to identify which of them will be affected. You will then need to change their processes accordingly.
So, how has tax legislation changed?
Since 6th April 2016 the legislation has changes in the following ways:
- HMRC’s powers to grant dispensations have been removed
- Expenses and benefits that would otherwise be deductible from earnings are exempt. Examples include travel and subsistence expenses, business entertainment and professional fees and subscriptions;
- It is now a statutory requirement that employers operate a system for validating employee expense claims, including those reimbursed by way of allowances;
- Regulations may exempt particular types of expense payment;
- There sampling rules to support employer requests for the agreement of bespoke allowances;
- The new exemption is disapplied when expenses are reimbursed in conjunction with salary sacrifice arrangements.
Scale rate payments
If your current dispensations cover an expense allowance, per diem or scale rate payment, employers will have four options.
- HMRC benchmark rates. In the case of subsistence, new regulations provide for allowances of £5, £10 or £25 depending on the duration of the travel. Full information on the benchmark rates can be found via this link http://bit.ly/1XVZkIe For employees travelling outside the UK, HMRC will still accept subsistence rates up to the Foreign and Commonwealth Office (FCO) guidance Worldwide Subsistence Rates (although there may be some rationalisation of the current complex country-by-country approach).
- Bespoke rates. Employers will need to conduct a sampling exercise to provide evidence to HMRC that the bespoke rates requested are a ‘reasonable estimate of the amount of expenses actually incurred’. If satisfied, HMRC will issue an ‘approval notice’ that will last for up to five years when it will need to be renewed.
- Industry/sector rates. Employers will still have to apply for an approval notice to use standard industry or sector-specific rates published by HMRC, but no sampling exercise would be required.
- Reimburse subject to tax and NIC. This will be the only option for employers that now reimburse travel and subsistence expenses under arrangements by which earnings vary with the expenses payments. Note that this wording goes beyond the normal meaning of ‘salary sacrifice’ arrangements. Employers can still make such reimbursements subject to tax and NIC and employees can claim tax relief for the time being, subject to further restrictions that apply to individuals engaged through intermediaries and any further restrictions to day subsistence in the future.
System for reviewing expenses
We have mentioned that you need you will need to make adjustments or introduce a new system for checking expenses. This will need to be built around the current guidance at Employer Income Manual.
HMRC understand that expenditure may be evidenced in various ways and will take a pragmatic approach by not insisting that receipts have to be retained in absolutely all cases (eg contactless payment used on public transport) to qualify for exemption.
Five-year agreements and transitional arrangements
Bespoke rates of allowance agreed in a dispensation within five years before 5th April 2016 will be allowed to continue under a new agreement until the fifth anniversary from their original agreement. However, a new approval notice will be needed from 6 April 2016, although sampling will not be required if nothing material has changed. All bespoke allowances must be renewed on their fifth anniversary whenever they are or were agreed.
After all of that, how can you stay compliant?
There are several key steps that you should take now in advance of the changes:
- Review current dispensations to determine whether all the items will be covered by the new exemptions, in particular bespoke allowances or other unusual items such as the business element of chauffeurs or jets used by senior executives.
- Determine where new agreements with HMRC will be needed, and the steps required to obtain new approval notices where required. Consider sampling, internal processes and new expenses checking procedures.
- Consider how salary sacrifice arrangements will be affected and how you will exit from them with minimum disruption.
- Ensure your approach to partly exempt expenses or benefits is compliant, noting the difference between the two.
- Review and update expense policies, documents and provide additional training for employees or managers involved in reviewing claims.
- Review international aspects of your current policies, in particular positions taken on payroll, P11Ds and tax returns.
- Identify cases in which it is uncertain that an employee’s expenses meet the conditions of the exemption. Take advice and/or discuss with HMRC how best to treat these. There is some uncertainty as to whether inclusion on P11Ds will be permitted; in any event, this would come with a Class 1A NIC cost.
The next step that you need to take as soon as you can is reviewing whether your current system will meet the new requirements and if not what you need to change.
If you are still unsure or need any advice on making these changes then get in touch and as always we will be happy to help.
