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All you need to know about the new automatic P11D dispensation regime
20 January 15 | By: Jas Jhooty
The government has been consulting on the replacing the current expenses dispensation regime with an automatic statutory exemption for paid and reimbursed expenses. Draft new legislation based on the responses to this consultation process has recently been published and can be viewed here.
The Government proposed a variety of measures to assist employers in removing a substantial burden by exempting all allowable expenses from having to be reported on a P11D form without the need for employers to go through the laborious P11D dispensation process.
The use of appropriate business “models” of acceptable record keeping and checking processes was mentioned in the original consultation document. Responses to this proposal included references to the following safeguards: -
- associated guidance can be easily understood and applied
- it should be clear that models are only examples of potential procedures to be adopted and that providing all necessary requirements are otherwise met, any alternative system not covered by the models can be applied with equal acceptability
HMRC will been instructed to develop models with the assistance of external stakeholders (including emTax) over the next twelve months.
Benchmark scale rates
The Government recognised that custom or bespoke scale rates can be a valuable aid to employers, cutting down the level of administration and ensuring that employees can be given clear advice on the amounts they can claim. As a result, the Government has decided that this feature will be retained in broad terms.
To meet concerns that the majority of employers will want to have some engagement with HMRC during this process, the legislation will provide that employers can use custom scale rates as long as they have been agreed by HMRC. Employers will need to apply to HMRC, and the statutory requirement will be that the application will need to be in a certain format and include certain information that HMRC specifies.
In practice, employers will have to submit evidence to support the amount of the custom scale rate that they have applied for. This will likely, but not exclusively, be in the form of a sampling exercise.
If the application is accepted, HMRC will set out the terms of the agreement in a notice which will include the following information:
- the date from which the agreement has effect;
- the date on which the agreement expires;
- the amount of the scale rate or rates agreed;
- the expense(s) which the scale rate or rates apply to; and
- the circumstances under which it may be paid.
Where a custom scale rate is agreed by HMRC, a notice will be issued to set out the terms of its use. This will include a date for the expiry of the agreement which will be no longer than five calendar years after the date the notice is issued. The Government is currently considering the treatment of custom scale rates which have been agreed in advance of the new exemption but which have been in use for less than five years at the time it comes into force
Scale rate payments for micro-employers
The original consultation favoured disallowing micro-businesses from claiming the daily subsistence rates published in HMRC guidelines. After listening to representations that it would be unfair to discriminate between micro-businesses and larger employers the Government has agreed that micro-businesses can continue to be allowed to use the published scale rates for subsistence.
One of the key aims of the legislation introducing an exemption for deductible expenses is to do away with the need for employers to apply for dispensations at all. The new exemption will remove the charge to tax on:
- payments for deductible expenses made to employees
- payments for deductible expenses made on behalf of employees
- other deductible benefits or facilities of any kind.
As a result, the Government feels that there is not sufficient justification for employers to continue to use existing dispensations beyond the date that the new exemption comes into force provided employers are given a suitable length of time to prepare for the change.
The Government has further decided that it would be best to deliver the benefit of this to all employees and employers as soon as is practicable. The Government has therefore concluded that to assist employers and give them certainty in making the necessary changes to their processes and systems the legislation will be introduced in 2015, but will not take effect until 6 April 2016.
New dispensations will be handled in the normal way during the intervening period, but will be given an expiry date of 5 April 2016.
Legislation will be introduced in Finance Bill 2015 to amend ITEPA 2003 to exempt from income tax expenses payments and BIKs provided to employees where they would have been eligible for a deduction, had they incurred and paid the equivalent expense themselves.
The exemption will also allow employees to be paid a “scale rate” in respect of a qualifying expense, rather than being reimbursed the expense they have actually incurred. This can either be a rate set by HMRC in secondary legislation, or a rate that they have agreed with HMRC. Amendments to regulations will be made to mirror this change for NICs purposes.
Section 65 ITEPA 2003 (which allows dispensations to be granted in respect of expense payments and most non-cash Benefits-in-Kind) and section 96 ITEPA 2003 (the equivalent for non-cash vouchers and credit-tokens) will be withdrawn as part of this measure.
Unlike dispensations, the exemption will not be able to apply to expenses payments or BIKs that are provided as part of a salary sacrifice arrangement. This element of the measure will result in a yield to the exchequer from employers and employees who currently make use of such arrangements. Amendments to regulations will be made to mirror this change for NICs purposes.