HMRC have introduced new procedures to streamline the reporting of benefits in kind. Previously employers had to apply to HMRC for a dispensation which ensured that expenses payments, that were incurred solely for business purposes, should not be declared on P11D
PAYE Dispensations - what are they?
Many years ago, someone at what was then called the Inland Revenue (I fondly remember the old department, you could actually speak to someone who knew what you were talking about and took ownership of cases!!) invented a system which
- Treated expenses reimbursed to an employee as earnings
- Required employers to report those expenses on a P11D
Allowed employees to make a claim for tax relief to the extent that the expenses were business expenses
However this caused problems for HMRC because they were inundated with claims from employees stating that the expenses were incurred wholly, exclusively and necessarily in the performance of the duties, and therefore not taxable.
The Inland Revenue, that was, introduced the Dispensation as a way of streamlining the process and reducing the number of claims they received from employees. Employers could apply to Inland Revenue and more recently HMRC, to dispense with the need to report certain expenses from P11D and so remove the need for employees to make claims.
This system has stood the test of time, not to mention the advent of technology, however has been onerous and costly to administer for both sides.
What has changed?
Legislation has been introduced to provide a statutory exemption for specific payments. The effect of this legislation is that many expenses that would have been covered by a dispensation, will from 6 April 2016, be exempt from tax and NIC’s.
If employees would have been entitled to tax relief in full then it will no longer be necessary to report such payments to HMRC on form P11D.
What are the common expenses covered by the exemption?
- Travel and subsistence expenses
- Fees and subscription
- Business entertainment expenses
However, employers who provide non-allowable expenses or non-exempt benefits will still need to put these on form P11D. Examples of non-exempt benefits are company cars, vans and medical benefits. Examples of non-allowable expenses are round sum payments.
Travel and Subsistence
There are 2 types of scale rates that employers can use
- Benchmark rates
- Bespoke rates
Benchmark rates do not require any authorisation from HMRC on the basis that the expense has been incurred wholly exclusively and necessarily in the performance of the employee’s duties and the employee has been away from their normal place of employment. The new regulations allow for the following meal allowances:
- £5 where the travel exceeds 5 hours (1 meal)
- £10 where the travel exceeds 10 hours (2 meals)
- £25 where the travel exceeds 15 hours and is ongoing at 8 pm (3 meals)
For bespoke rates that were previously covered by a dispensation, an application must be made to HMRC for an exemption to continue to pay those bespoke rates.
Whether the benchmark rates or bespoke rates are paid there must be a robust checking system in place to ensure that the payments can be made tax free. This will include expenses claims submitted by employees being checked by the employer.
Authorised mileage allowance payments are scale amounts that employers can pay to employees using their own vehicles for business travel. Most peoples will recognise these rates which allow claims of 45 pence per mile up to 10000 miles and 25 pence thereafter. Any amounts paid in excess of the approved rates are taxable and subject to National Insurance Contributions.
Fees and Subscriptions
Examples are professional fees such as accountancy and other professional bodies. If such fees are paid by the employer, there is no requirement to include on P11D and are covered by the statutory exemption
Prior to the introduction of the statutory exemption, the benefit rules required all expenses incurred on business entertaining to be included on a P11D (or in within a dispensation). Business entertaining, although not allowable when computing businesses profits, are an important tool used by many businesses to attract and retain contracts.
The historic view of many PAYE inspectors was that if they could be satisfied that the expenditure was wholly for the purpose of the employment and the business, they would take no action, even if they had been omitted from form P11D.
The exemption now covers such expenditure. However as with all expenses, there must be an internal checking system in place for independent reviews of the expenses to ensure they meet the snappy title of, ‘wholly, exclusively and necessarily incurred in the performance of the duties of employment’ test.
Although the exemption is designed to simplify the payment and reporting of benefits, care is required to ensure the new rules are adhered too. Please contact us if you have any queries or would like us to assist with the provision of expense payments.