P11D dispensations – it’s all change from April
It is a common misconception that business expenses do not need reporting on annual P11D forms; only taxable benefits and expenses do. But P11D forms are for employers to report benefits and expenses, not to determine whether they are taxable or not. It is the employee’s responsibility to subsequently claim any tax relief via their tax return or separate claim form.
Employers have been able to apply to HMRC to seek approval to dispense with having to report business expenses on annual P11D forms for its employees. These dispensations have always been an important tool for employers as they can not only vastly reduce the admin burden come P11D completion time, but they can also avoid the problems that an employee might encounter if HMRC adjusts their PAYE code and subjects them to tax on what are genuine business expenses (an all too common problem in recent years).
In applying for a dispensation, an employer needs to satisfy HMRC that they operated sufficient checking and authorisation procedures for their expenses and that the expenses being put into the dispensation were wholly business expenses.
However, there are some significant changes coming on 6th April:
Dispensations are ending on 6th April
From 6th April 2016, business expenses that are paid on behalf of or reimbursed to employees will be exempt from tax. They will not be reportable anymore and dispensations will be abolished.
This means that from next month, business expenses such as travel and subsistence, business entertaining and professional fees and subscriptions (the type of expenses that hitherto would typically be included in a dispensation) will simply be exempt.
This will be welcome news for any employers who do not currently have a dispensation as, from next year, they will most likely benefit from not having to prepare as many P11D forms. For those who currently have dispensations, things should carry on as usual.
But whilst introducing the new statutory exemption for business expenses, HMRC have also taken the opportunity to make a few key changes that need to be noted:
- It is now a statutory requirement for employers to operate a system for validating employee expense claims. HMRC have given guidance as to what systems they will be expecting to see.
- Where expenses are paid using the benchmark scale rates or at an agreed bespoke rate, employers must operate a checking system to ensure that employees are incurring an expense, and maintain appropriate records (i.e. obtain receipts). This is something of an about-turn from HMRC as the benchmark scale rates were originally introduced on the basis that that they would save employers the admin burden of maintaining receipts.
- The new exemption is specifically dis-applied where expenses are reimbursed in conjunction with a salary sacrifice arrangement. So any such arrangements would be best advised to cease before 6th
- Bespoke scale rates agreed in a dispensation within the five years prior to 6th April 2016 can continue to be used under a new agreement until the fifth anniversary from their original agreement. However, employers must apply to HMRC to receive a new approval notice to be allowed to continue using these rates from 6th April 2016 (although a sampling exercise will not be needed if nothing has materially changed). All bespoke allowances must be renewed on their fifth anniversary.
- Similarly, if employers wish to pay or reimburse employees at a rate that has been agreed with HMRC at an industry-wide level, they must apply to HMRC for an approval notice, which again would have effect for up to five years.
- For expenses which are only part-business related, only the taxable (personal) element is reportable on a P11D form and the business element will be exempt. However the treatment of benefits that are only part-business is different. Unless the whole of the benefit qualifies for the exemption, the whole benefit is reportable on a P11D form – leaving the employee needing to make a claim via their tax return or separate claim form P87 for tax relief on the business element.
What employers need to do to remain compliant
It is important that employers review their positions and take several key steps:
- Review current dispensations to check all included items remain relevant and will be covered by the new exemptions.
- Review whether current checking and authorisation systems will be robust enough to meet HMRC’s requirements, which may involve the need to review and update expenses policies and train staff who deal with expense claims.
- Identify whether any application needs to be made to HMRC by 6th April to obtain approval notices in order to be able to continue to pay scale rate payments or bespoke allowances.
- Consider if any salary sacrifice schemes will be affected by the new rules, and how they can be closed down with minimal disruption.
- Be aware of the new rules for partly exempt expenses and benefits, and the P11D reporting requirements.
These changes are likely to reduce the P11D compliance burden for some employers, but they come with many hidden traps and new statutory obligations placed on employers.