Dispensing of the Dispensation
P11D Dispensations were abolished from 6th April 2016 and have been replaced by a new automatic statutory exemption for reimbursed business expenses.
What were P11D dispensations?
Every employer who paid reimbursed business related expenses had to previously make a P11D dispensation (P11Dx) application to HMRC using their PAYE scheme details and include details of the type of expenses that were being reimbursed, where they wanted them to be paid free of Income Tax and National Insurance (NI) to employees and directors. HMRC would then make a decision to grant, part grant or decline an application and issue a notice of their decision.
Without a P11D dispensation, the employer would have to report the expenses on an individual’s P11D and the employee would have to pay the Income Tax unless they made a counterclaim via form P87 to claim the Income Tax relief.
Why the change?
The Office of Tax Simplification (OTS), who act on behalf of the UK Government, issued a report in 2014 regarding the simplification of many aspects of the administration of the tax system. They specifically identified the P11D dispensation process as one area that needed reviewing and updating, to remove administrative burden from employers. However, despite the removal of an initial administration burden, this has arguably pushed even more onus towards employers, who now have to decide for themselves which expenses fall under the new exemption rules.
What exactly has changed?
The Finance Act 2015 introduced sections 289A-E into Part 7A of ITEPA 2003, effective 6th April 2016, and effectively achieve the following:
- removes HMRC’s powers to grant dispensations (by omitting ITEPA 2003 ss 65 and 96)
- exempts expenses and benefits that would otherwise be deductible from earnings under ITEPA 2003 Chapters 2, 5 of Part 5, or Chapter 3 of Part 5, such as travel and subsistence expenses, business entertainment and professional fees and subscriptions
- makes it a statutory requirement for employers to operate a system for validating employee expense claims, including those reimbursed by way of allowances
- provides that regulations may exempt particular types of expense payment
- introduces sampling rules to support employer requests for the agreement of bespoke allowances
- disapplies the new exemption when expenses are reimbursed in conjunction with salary sacrifice arrangements.
What does it mean practically?
The main condition attached to the new statutory exemption is that employers must have a robust 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 have applied for Approval Notices by 6th April 2016 if they wish to continue to pay these rates tax free.
Benchmark subsistence rates
These new rates do not require any sampling exercise and can be used by all employers subject to the following conditions being met:
- Minimum journey time of 5 hours – £ 5 maximum meal allowance
- Minimum journey time of 10 hours – £10 maximum meal allowance
- Minimum journey time of 15 hours – £25 maximum meal allowance
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:
- the travel must be in the performance of an employee’s duties or to a temporary place of work, on a journey that is not substantially ordinary commuting
- the employee should be absent from his normal place of work or home for a continuous period in excess of five hours or ten hours
- the employee should have incurred a cost on a meal (food and drink) after starting the journey
Employers can pay less than the published rates but employees cannot claim tax relief on the difference. They can however 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 (i.e. P87 form). Employers paying more must subject the surplus to tax and NI.
- 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.
Travel schemes involving salary sacrifice
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, are all now taxable by virtue of section 289A of ITEPA 2003.