The Abolition of Dispensations
The employment tax rules are being significantly changed with effect from 6th April 2016. One key change relates to the abolishment of dispensations.
What is a dispensation?
A dispensation is a notice from HMRC which essentially simplifies the employer’s P11D reporting requirements, allowing the employer to avoid the need to report certain benefits and expenses on a Form P11D on the basis that they were incurred wholly, exclusively and necessarily in the performance of the employment duties. Such expenses ultimately do not attract tax and NIC.
With effect from 6th April 2016, the dispensation will be replaced by a new statutory exemption for reimbursed business expenses, which will mean that employees will no longer be required to claim a deduction for those business expenses reimbursed by the employers as these business expenses will now be treated as exempt from tax and NIC. Dispensations previously agreed with HMRC will cease to apply from 5th April 2016, however the majority of expenses previously covered by a dispensation are likely to fall within the new exemption.
Benefits and expenses that are neither exempt nor covered by a dispensation will continue to be reported to HMRC by both employers and employees.
It is imperative that employers continue to monitor their systems and processes to ensure that sufficient records are held. Employers will need to continue to check and authorise their employee expenses, ensuring that expense claims are supported by receipts for the expenditure incurred and validating that the expense claims specifically relate to business use. Employers will need to be able to prove to HMRC that their systems and processes are operating compliantly, to avoid them being revoked.
For those employers with existing dispensations in place, it is likely that those dispensations include bespoke scale rates for travel and subsistence and overnight stays. These rates will no longer be valid post 6th April 2016 and are likely to fall outside of the scope of the new statutory exemptions. Employers will therefore need to conduct a sampling exercise in order to provide evidence to HMRC that the bespoke rates represent a reasonable estimate of the amount of the expenses actually incurred. On the basis that HMRC are satisfied, they will issue an ‘approval notice’ which will need to be renewed every five years.
Transitional arrangements will exist in circumstances where dispensations are less than five years old. HMRC will allow the bespoke rates previously agreed to continue under a new agreement until the fifth anniversary of the original agreement date. A simple application can be made to HMRC. Please contact us if you would like to apply to continue to use your existing bespoke rates.
Post 6th April 2016 reporting requirements
Employers must have a checking system in place and continue to monitor their systems and processes to ensure that they are validating that the expenses are incurred wholly, exclusively and necessarily in the performance of their duties and that all expenses continue to be receipted and authorised.
Employers should therefore now look at reviewing their current policies and procedures and where required look to improve these to ensure continued compliance.
The information was correct at time of publishing but may now be out of date.