P11d dispensations for expenses will be replaced from 6 April 2016 and will be replaced with other legislation.
At the moment, if you pay or reimburse deductible expenses (or provide benefits in kind that are covered by a matching deductible expense) to any of your employees, you have to report these on the return or expenses and benefits (Form P11d) and those employees must then contact HMRC to claim back any tax relief they are entitled to – unless you have previously agreed a ‘dispensation’ with HMRC. A dispensation is an agreement that specified expenses and benefits can be provided to employees without deducting tax and National Insurance and without reporting them to HMRC.
Employment tax rules are being significantly changed from April 2016. The following have already been announced:
- The abolition of the £8,500 threshold for taxing certain benefits in kind.
- The voluntary pay rolling of benefits in kind.
- The replacement of dispensations with an exemption for paid or reimbursed expenses.
It is important that employers are aware of these changes and have reviewed their processes and procedures accordingly. With regard to the scrapping of the requirement to obtain a dispensation this is potentially adding a level of risk to the employer and this needs to be considered carefully.
Period to 6 April 2016
HMRC can still issue dispensation notices until 6 April 2016. Therefore it is important that businesses assess whether they want to apply for a dispensation to cover the period to April 2016. Those employers with existing dispensations should continue to monitor their systems and processes to ensure that sufficient records are held to prove that they are being operated correctly and that HMRC have no reason to consider revoking the dispensation. HMRC have the power to revoke a dispensation retrospectively and can review for as long as a tax year is open (so for a minimum of 4 years).
Post 6 April 2016
From 6 April 2016, a new exemption means you will no longer have to agree a dispensation with HMRC or report expenses or benefits in kind on form P11d where the employee is entitled to a tax relief for those expenses or benefits in kind. Those expenses or benefits in kind will now be exempt from income tax. This means however, that you will need to determine the correct tax treatment of the expenses you pay to your employees and whether a matching deduction is due. You will still be required to keep records of what has been paid or reimbursed to your employees as you do now.
It is recommended that employers look at existing dispensations in place prior to 6 April 2016 and consider any changes that are required to process and systems to ensure that expense payments are dealt with correctly in the future. This will apply to paid or reimbursed expenses and any flat rate expenses that may be covered by the existing dispensation.
Businesses need to protect any existing dispensations leading up to 6 April 2016 and will also need to consider the post dispensation period as it is more important than ever that they have robust processes and controls in place.
Such an exercise will highlight the changes that may be required to remain compliant in the post-dispensation period.
Whilst the above changes were introduced with the aim of reducing administration it can be seen to create significant risk to employers. Employers who do not have an existing dispensation in place from April 2016 need to be careful what items they decide not to report because if it transpires these expenses or benefits in kind are taxable then there will be a liability with the employer.
In light of this change it appears that there are a significant number of employers who are taking the step of obtaining a dispensation which they can then use after 6 April 2016 as a basis to decide which items can be specifically excluded from reporting. (Cleary this can only be reliable if there are no significant changes in the future expenses policy of the employer.)