The phrase has a vaguely late mediaeval ring to it, doesn’t it – like the Restraint of Appeals or the Supplication against the Ordinaries? And indeed dispensations are about to pass into history. Does it matter?
Under current law, 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, employers can (subject to meeting conditions) obtain a “dispensation” from HMRC that specified expenses – broadly, employment expenses reimbursement of which does not give rise to any net charge to tax – need not be reported.
From 6 April 2016 the law changes. Tax-allowable expenses will no longer be taxable at all. So the need for a dispensation falls away. Simples? Yes and no.
First, don’t throw away your dispensation just yet. HMRC can normally raise enquiries up to four years after the end of the tax year. So even after April 2016 you will need to keep evidence showing that you have historically complied with the terms of any dispensation (such as in your policies, procedures, sign-offs and so on).
Second, if you have a dispensation it’s likely to include bespoke scale rates for things such as subsistence and overnight stays. If you want to continue to use these rates you will need to re-apply for approval of them before 6 April 2016 or they will no longer be valid and the amounts will fall outside the new rules and be subject to tax and NIC. Where the existing dispensation is less than five years old, a simplified fast-track application can be made to HMRC for any bespoke rates to continue to apply until the fifth anniversary of their agreement.
Third, the new rules require that if the exemption is to apply, employers must have a checking system in place for ensuring that payments or reimbursements are only made on occasions where the employee would be entitled to a deduction from their earnings and has incurred and paid an amount in respect of expenses.
So what do you need to do?
- If you have a dispensation with bespoke rates, get them re-approved.
- Regardless of whether you currently have a dispensation, check whether your systems comply with the new rules.
- If you need help or are unsure of where you stand after 5 April, talk to us.
For more, please get in touch with your usual BKL contact or use our enquiry form.
