How to Stay Safe from HMRC
4 February 16 | By: Jas Jhooty
All P11D dispensations will become obsolete from 6th April 2016. They are being replaced by an automatic statutory exemption for paid and reimbursed expenses.
As HMRC are no longer involved in issuing P11D dispensations they have very recently updated their Employment Income Manual with details on how the system will operate.
The main condition attached to this new statutory exemption is that employers must have a system in place for checking that payments to employees are only made on occasions where the employee would be entitled to a deduction.
Mileage payments up to the Approved Mileage rates are exempted as well as new set of Benchmark subsistence rates. Employers who have previously agreed bespoke rates with HMRC must apply for Approval Notices that must be in place by 6th April 2016 if they wish to continue to pay these rates tax free.
These new rates do not require any sampling exercise and can be used by all employers subject to the following conditions being met:
Where a meal allowance of £5 or £10 is paid and the qualifying journey in respect of which it is paid lasts beyond 8pm a supplementary rate of £10 can be paid.
A meal is defined as a combination of food and drink and would take a normal dictionary meaning. Where employees are required to start early or finish late on a regular basis, the over 5 hour and 10 hour rate, whichever is applicable, can be paid provided that all the other qualifying conditions are satisfied.
Benchmark scale rates must only be used where all the qualifying conditions are met. The qualifying conditions are:
Employers can pay less than the published rates. If an employer pays less than the published rates, employees cannot claim tax relief on the difference, but they can claim a deduction from HMRC for the difference between what they actually spent on the expense and the amount reimbursed by their employer in the normal manner.
These rates are the maximum tax and NICs free amounts that can be paid by employers who choose to use the system. An employer can pay less than these rates if it wants to do so. If a higher payment or expense reimbursement is made without agreeing a tailored scale rate with HMRC, the excess over the published rate should be subject to tax and NIC’s.
An employee can only be reimbursed for a meal once. If the cost of an evening meal or breakfast is reimbursed on an actual basis, because it is included in the cost of an overnight stay, the employee would not also be entitled to the published rate for breakfast or late evening meal.
Working Rule Agreements – The published scale rates do not apply to employees covered by Working Rule Agreements, for which separate specific rates are already set for particular occupations.
Overnight subsistence rate – A rate has not been set for overnight subsistence. Employers wishing to agree a rate with HMRC for overnight subsistence will need to apply using the bespoke rate process.
Staying with friends and family rate – A rate has not been set for a scale rate payment for staying with friends and family. The travel rules still apply to actual costs of subsistence incurred while staying with friends and family.
Many employers have agreed higher bespoke rates for subsistence usually after a sampling exercise has been undertaken to prove to HMRC the requirement for such. All such bespoke rates become obsolete with effect from 6th April 2016 unless the employer applies for a new Approval Notice from HMRC. These include those employers who reimburse employees at a rate that has been agreed with HMRC at an industry-wide level e.g. the agreed overnight rate for lorry drivers
Approval Notices for bespoke rates can apply for a period of up to 5 years from the date on which they are approved and cannot apply retrospectively. A sampling exercise is required to be conducted to prove the necessity for bespoke rates. For new bespoke rates, employers should apply now with a view to their Approval Notice commencing on 6 April 2016.
As a transitional measure, where bespoke rates have previously been agreed in dispensations since 6th April 2011, no new sampling exercise is required but employers must still apply to have them continue under a new Approval Notice from 6 April 2016 for the balance of 5 years since they were agreed.
If previously agreed bespoke rates were agreed before 6th April 2011 a new sampling exercise is required to be undertaken and submitted before 6th April 2016 to accompany the request for an Approval Notice.
If such a request is not made before 6th April 2016 then older bespoke rates that are paid to employees under obsolete P11D dispensations previously agreed with HMRC will become taxable.
It will not be possible to continue with any arrangement whereby expenses vary in some way with earnings, without treating the expenses as taxable. So, as well as expenses paid under traditional salary sacrifice schemes, other arrangements which attempt to pay bonuses, top up amounts, or other forms of pay which vary with expenses, will all become taxable on 5 April 2015.
We recommend planning your exit accordingly to minimise disruption to your business. Consider an appropriate employee communications programme as a minimum. Employment business may also wish to consider whether employment or agency worker contracts are most appropriate going forward.
Unlike dispensations, Approval Notices cannot apply retrospectively under any circumstances, which means that they will need to be agreed with HMRC prior to 6th April 2016 for them to be effective for the entire 2016/17 tax year. Failure to do so, will result in bespoke rate expenses payments becoming taxable in the period from 6th April 2016 until a new Approval Notice is granted.
It is therefore imperative that employers review their current dispensation agreements, as well as rates and allowances which might currently be paid under a separate agreement with HMRC outside of a dispensation, to identify any payments which may require a new Approval Notice.
For those employers who have an older agreement (pre 6th April 2011) with HMRC to pay bespoke rates, a new sampling exercise will be required to be undertaken before an Approval Notice will be granted.
Our consultants can assist you in conducting the required sampling exercises and making the necessary applications for Approval Notices to pay bespoke rates. Please note that this issue is very urgent as HMRC has to have issued Application Notices before 6th April 2016 for them to have any effect. Please do not hesitate to get in touch with us if you require our assistance.
Finally, we have to express our disappointment at the way HMRC have deemed to issue these instructions at a very late stage and without any fanfare, leaving many employers with an extremely short timeframe to comply with the demands of this new system.