On 6 April 2016, a number of changes related to expenses and benefits regulations came into force under Section 12 of the Finance Act 2015. Employers should make certain necessary adjustments to ensure compliance.
The old regime – dispensations
Prior to April 2016, if an employer paid or reimbursed deductible expenses to any employee, they would have to report these on the return of expenses and benefits (Form P11d) and those employees would then have to contact HMRC to claim back any tax relief they were entitled to. This was unless a ‘dispensation’ had previously been agreed with HMRC. A ‘dispensation’ is an agreement confirming that expenses and benefits can be provided directly to employees without deducting tax and NI and without having to report to HMRC.
The new regime – exemptions for paid and reimbursed expenses
From 6 April 2016 onwards, a new exemption means that you no longer have to pay tax and National Insurance Contributions (NICs) on qualifying paid or reimbursed expenses payments. Where an employee is entitled to claim a tax deduction, employers will no longer need to apply for a dispensation or report these expenses to HMRC on form P11D. Dispensations previously agreed with HMRC will no longer apply after 6 April 2016. Employees should now also keep receipts for all expenses.
These new rules will only exempt ‘allowable’ expenses. ‘Allowable’, for the purpose of these regulations, means ‘incurred wholly, exclusively and necessarily in the performance of the duties of the employment’. Employers will be able to reimburse expenses that are exempt in one of the following three ways:
- On an actual, receipted basis;
- At the approved benchmark scale rates as set out in HMRC guidance (EIM30240)
- At rates agreed with HMRC under a bespoke agreement
Non-allowable expenses will still need to be either subjected to income tax and/or NICs through the payroll, or reported to HMRC on the form P11D. Employers are encouraged to seek professional advice if they are unsure whether certain expenses are allowable or not.
The Income Tax (Approved Expenses) Regulations 2016 has set new benchmark scale rates. If the rate of reimbursement is within these benchmark rates, then there is no reporting obligation.
For those employers that have bespoke scale rates, these will be allowed to continue for five years from the date they were originally agreed. However, employers will have to obtain an ‘approval notice’ from HMRC allowing them to continue.
If an employer wishes to make payments to employees at a rate higher than the approved benchmarks, they will need to agree this with directly with HMRC before they are able to make such payments, tax-free.
What steps should employers take?
In order to ensure compliance with the above new rules, employers should:
- Review their current expenses and benefits procedures.
- Put in place a detailed checking system to ensure that all payments or reimbursements of expenses do not include any ‘disallowable’ elements. This should be done regularly during the year and carried out by someone other than the person to whom the expense relates.
- Establish that each expense is ‘allowable’ for the employee.
- Periodically review employee expenses claims to ensure the amount they pay reasonably reflects the costs that employees are actually incurring.
- Review any bespoke rates that may already be in place and seek approval from HMRC for them to continue.
The government has also published guidance on these new rules. For further information or questions, please contact a member of Devonshires’ Employment team.