Currently, employers are obliged to notify HMRC (on form P11D) of expenses reimbursed to employees and directors. The individual receiving the reimbursement then makes his or her own claim for tax relief if appropriate. To short-cut this process, employers often obtain a “dispensation” from HMRC that allows for specified expenses to be provided to employees without deducting Tax and National Insurance.
However, as of 6 April 2016, tax-allowable expenses will no longer be taxable at all, which means where an employee is entitled to tax relief on their expenses you will no longer have to agree a dispensation with HMRC or report these expenses on form P11d. The risk with this new process is that you will now be responsible for applying the correct tax treatment to all of the expenses you pay and you will need to keep records of all payments.
This new process presents a significant risk to employers and it is important that you are aware of the following three points:
- HMRC can revoke and review dispensations for up to four years following the end of the tax year. Therefore, do not throw your existing dispensations away and keep evidence to show you complied with the dispensations you were granted.
- If you have a dispensation with bespoke rates for expenses, such as subsistence and overnight stays you will need to re-apply to HMRC for approval of them before 6 April 2016. Failing to do this will mean the rates will no longer be valid and the amounts will fall outside the new rules and be subject to Tax and NIC.
- Under the new legislation you must have strong processes in place to ensure that you are compliant and that payments or reimbursements are only made in the right circumstances, with the correct tax treatment applied and record of the payment kept.
For further information or for help with your payroll, please contact Suda Ratnam at suda@raffingers.co.uk.