Dispensing with dispensations….

So the current tax year ends on 5 April 2016 – weeks away you might think. However it is always advisable to look at “pre-year-end tax planning” a few weeks before 5 April each year in case any action needs to be taken.

One area where action may need to be taken concerns P11D dispensations. This is where an employer has obtained a dispensation from HMRC for the reporting of non-taxable expenses and benefits on form P11D.  Where a dispensation is in place, this also means that employees do not have to enter expenses or benefits received on their own tax return (with a claim that they were incurred “wholly, exclusively and necessarily in the performance of their duties of the employment”).

From 6 April 2016 the dispensation regime is rendered obsolete to be replaced with a statutory exemption for non-taxable expenses and benefits. This will rely on the employer operating a system for validating employee expense claims typically for the reimbursement, for travel and subsistence expenses, business entertainment and professional fees and subscriptions, of the amounts actually incurred and substantiated by receipts. So if an employer has robust systems in place for validating and paying expenses they can carry on post 6 April 2016 as their dispensation will be replaced by the statutory exemption. Indeed, employers without an existing dispensation but who have suitable systems in place can also take advantage of the new regime from 6 April 2016. As always, the risk lies with the employer so it might be advisable to review expense policies now so all is in order before 6 April.

Where reimbursement is by way of round sum allowances or scale rates such expenses may continue to be paid free of tax and national insurance. For example, for subsistence allowances, use of the HMRC “benchmark rates” (£5, £10 or £25 depending the duration of the travel) will be exempted under the new rules.

However, if reimbursement is by way of bespoke rates employers must act now to ensure that such payments can continue to be paid free of tax and national insurance. The payment of bespoke rates must be agreed with HMRC by the employer using a sampling exercise to provide evidence to HMRC that the rates paid are a reasonable estimate of the amount of expenses actually incurred. If approved, HMRC will issue an “approval notice” which will last for up to five years. The approval notice must be in place in advance of 6 April 2016 as it cannot be backdated to the beginning of the tax year (unlike the old system for dispensations). Even if bespoke rates are included in an existing dispensation, an approval notice still needs to be in place before 6 April 2016; for existing dispensations granted since 6 April 2011, the approval notice still needs to be applied for although the sampling exercise will not be needed if nothing material has changed since the dispensation was granted.

This is only one of a raft of changes affecting employment tax coming into force on 5 April 2016 so any employers requiring advice in this area should contact their Barnes Roffe LLP contact partner as soon as possible.

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