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An examination of HMRC’s consultation on replacing the current P11D dispensation regime
12 August 14 | By: Jas Jhooty
In June, HMRC launched details of four important consultations aimed at simplifying existing benefits and expenses legislation. In this article we analyse the contents of the consultation document to replace the expenses dispensation regime with an exemption for paid or reimbursed expenses.
Many observers have commented that the current P11D Dispensation process is a bureaucratic paper chasing exercise. The aim of this particular consultation document is replace the old regime with an automatic exemption that will apply to all payments, reimbursements and benefits-in-kind (BiKs) where the employee would be eligible for tax relief.
This new approach would mean that employers would need to determine, based on proposed new HMRC guidance whether any expenses payment they make qualifies for tax relief or not.
What has been proposed?
This new exemption will apply to all expenses payments and BiKs if the employee would have qualified for tax relief if they had paid for the expense themselves. There are no proposals to change the rules on which expenses qualify for tax relief as part of this proposal. This new exemption would apply to all employers and it will not be an opt-in/opt-out process.
Record keeping requirements will be broadly similar to those for expenses payments made under a dispensation, and most employers can continue to use benchmark scale rates.
Potential loss of assuranceThose employers who have obtained dispensations and have kept them up to date have some degree of assurance from HMRC that they are processing their business expenses correctly. As this new system will automatically apply exemption there is a potential for a lack of assurance arising. To counter this HMRC are proposing to develop a set of “models” of HMRC acceptable record-keeping processes such as: -
- The documentary evidence that needs to be retained and checked
- How long this evidence should be retained for
- The frequency and nature if the checks that need to be performed
- The proportion of employees that should be checked
HMRC currently publish a set of benchmark scale rate payments that employers can use instead of actual receipts for meals taken whilst an employee is away on business. If an employer feels that they require differing scale rates more suitable for their particular industry, they can undertake a sampling exercise of actual expenditure and make representations to HMRC for different scale rates to apply for them. HMRC state that less than 1% of employers apply for their own custom rates and are consulting on whether or not HMRC should still be involved in setting custom scale rates. One proposal is to allow employers to self-certify the sampling exercise undertaken to support a custom scale rate as long as the sampling process is based on HMRC guidance.
Strangely, HMRC are proposing to disallow micro companies and directors of close companies from using the benchmark scale rates. HMRC is arguing there will be no administrative savings from paying a scale rate instead of reimbursing the actual cost of the expense.
HMRC are concerned that some employers may take comfort from their existing dispensations and may feel that any removal of that dispensation will lead to a loss of assurance. One proposal is to allow employers to continue with their existing dispensations for a transitional period. HMRC are consulting on how long any transitional period should be. HMRC appear to be favouring some sort of transitional arrangement, as this would allow them time to devise new guidance that will be absolutely necessary for employers to be confident in the tax treatment of their reimbursed expenses.
How emTax can help
Over the summer emTax have been invited to attend stakeholder meetings with HMRC to discuss these proposals. If you have any thoughts or ideas about what you think these proposals, please let us know so that representations may be made to HMRC on your behalf.