What is the issue?
P11D dispensation agreements have ceased and associated expenses and benefits legislation has changed from April 2016.
What does it mean to me?
Business expenses that are deductible by employees will become exempt if reimbursed by employers, subject to conditions. They will not be reportable by anyone and dispensations (reporting waivers) will be abolished. 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). At the same time any reimbursement of travel, some other expenses and certain benefits in conjunction with salary sacrifice schemes, will become taxable.
Employers will need a system in place to check that employees have incurred expenditure before they make a tax-exempt reimbursement by way of a scale rate payment.
What checks do I need to be making?
For the new exemptions to apply, employers will need to have a robust checking system in place to ensure that:
- Employees are in fact incurring and paying expenses of the kind reimbursed
- A tax deduction would be allowed in respect of those amounts and if not they are being picked up for inclusion on P11D
The extent of checking undertaken by the employer will depend upon the scale of the business. They will need to demonstrate that someone other than the employee incurring the expense is responsible for ensuring that the payment:
- Relates to qualifying travel in the case of travel and subsistence expenses
- Does not include disallowable items
- Is not excessive
The form and regularity of the checks will depend on the following factors:
We recommend the following:
- The size and complexity of the workforce
- Uncertainty about whether employees will qualify for an exempt payment, e.g. where the temporary workplace rules apply for example. This should be more closely monitored.
- Unpredictable or non-standard work patterns, e.g. where scale rate payments have been agreed for irregular working, the employer may want to check that the agreed conditions are being met.
- The employer has no previous experience in the management of an expenses regime. Where the employer has not previously paid expenses HMRC may wish to insist on a larger or more regular sample check.
- There is evidence that the employer has failed to manage an expenses regime effectively in the past.
- Any other risk factors identified by HMRC.
What else do I need to be doing?
- Incorporate a review of the completion of the attendance records, diaries, work schedules etc. and supporting receipts obtained and retained by employees sufficient to satisfy HMRC.
- Be undertaken regularly during the year. This may be monthly, quarterly or half yearly depending on the number of factors present.
There are several key steps that employers should take now:
- 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.
- 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.