Benefits in kind – new rules following the abolition of dispensation
Are you fully aware of the new exemptions for certain benefits in kind?
Exemptions replace dispensations
From 2016/17 dispensation rules exempting employers from reporting certain benefits in kind on P11D have been abolished and replaced by exemptions. Any dispensations previously granted by HMRC ceased to be valid after 6 April 2016.
Exemptions operate in a way similar to that of dispensations – certain expenses incurred by employees personally, wholly, exclusively and necessarily in the performance of the duties of the employment, and refunded by employers, do not need to be reported on P11D.
HMRC has indicated that it expects 'almost all' expenses and benefits in kind that were covered by a dispensation to be covered by the new exemption.
The most frequent examples include UK and international travel (except where IR35 and working through an intermediary company applies), subsistence, professional fees and subscriptions and costs incurred by entertainers in respect of fees paid to their agents for finding them work.
Rules for expenses only partially incurred as part of the performance of employment duties and for the purposes of business do not change and those will need to be put through payroll in full. Employees will need to claim tax deduction from HMRC on the part that is exempt via self-assessment. For example, the reimbursement of home broadband costs incurred by an employee regularly working from home does not meet ‘the wholly, exclusively and necessarily’ test because it is a reimbursement of a personal cost and should therefore be reported on form P11D and/or included in payroll.
Those reimbursed business expenses an employee incurs which normally would qualify for a tax and NI exempt treatment, in instances where the employee has been reimbursed by accepting value from the employer which is subject to salary sacrifice, are not covered by the exemptions rules. Such expenses are reportable on P11D and are be taxed on the employee at that point, unless the employee claims tax relief. For example, this would apply when there is a formal agreement between the employee and the employer that business travel is included in the salary sacrifice arrangement, or the employee’s salary levels vary, depending on the amount of travel and subsistence costs incurred and refunded.
How the exemptions rules work
For an exemption to apply, expenses need to be reimbursed in one of three ways and are subject to a checking system being put in place.
1. At approved HMRC's benchmarked scale rates - without needing the prior approval of HMRC
Applies to mileage of privately owned cars, vans, motor bikes and bicycles, but rates differ
Applies to self-employed and employees / directors
First 10k miles – 45p per mile is tax and NIC free. Higher rates will attract income tax and national insurance.
Further mileage over 10k miles – 25p per mile is tax and NIC free. Higher rates attract income tax, but national insurance is payable only if the refunded rate exceeds 45p.
Reimbursement by the employer of less than 45p / 25p will attract tax relief, as income subject to tax throughout the tax year has not been reduced by the amount of mileage expense covered by the employee and not refunded by the employer. This is similar to any other business expenses incurred by an employee and not refunded. Claim up to £2.5k can be made via the individual’s self-assessment, online or by filling in form P87. Claims exceeding £2.5k can only be made via self-assessment tax return. More information can be found here .
applies where an employee carries another employer in the car or vam
5p per mile is tax and NIC free.
The passenger has to be a fellow employee – therefore the allowance does not apply to subcontractors, clients and business partners of other entities
There is no relief if less than 5p per mile has been refunded
Motorcycles – 24p per mile is tax and NIC free, irrespective of mileage
Bicycles – 20p per mile is tax and NIC free, irrespective of mileage
Company car fuel rates
Applies when an employee pays for fuel for business travel in a company car
Excess refunded is subject to income tax and national insurance
Current rates apply from 1 June 2017
Petrol - amount per mile
LPG - amount per mile
1400cc or less
1401cc to 2000cc
Diesel - amount per mile
1600cc or less
1601cc to 2000cc
Previous daily rates (£5 breakfast rate and one meal rate, £10 two meal rate and late evening rate) are no longer valid after 5 April 2016
Reimbursed amounts need to be per receipts or per bespoke rates agreed with HMRC
Included are daytime expenditure on meals, overnight incidental expenses in the UK and daily and incidental expenses for work duties undertaken abroad
Up to £4 per week without receipt or proof
Higher amounts will require notice of approval (see below) from HMRC
2. At bespoke rates – after agreeing them with HMRC and obtaining an approval notice
Scale rates need to be agreed in advance
Approval is issued by HMRC following a review of calculation submitted, which needs to show a reasonable estimate of expenses, based on a sample of expenses actually incurred before the approval was issued
Available for 5 years from the date stated on the approval notice but can be revoked if HMRC have a reason to do so
Employees incurring more than the bespoke rate refunded can make a tax relief claim, supplying supporting evidence.
Transitional rules cover those bespoke rates previously agreed with HMRC on or after April 2011. The agreed rates will be valid for five years since the agreement date.
Industry scale rates previously available without prior approval now need to be agreed with HMRC. For example subsistence rates for lorry drivers applicable to employees (not available to self-employed) of £34.90 per night or £26.20 per night for drivers of a vehicle with a sleeper cab, from 6 April 2016 require HMRC’s approval.
3. Actual amounts incurred by the employee per evidence presented (ie receipts)
In order to achieve a tax and NIC exempt treatment of business expenses reimbursed, and incurred in one of the three ways described above, the employer must have a demonstrable checking system in place as of 2016/17. The aim of the checking system is to show that:
the employee actually incurred the expense
the expenses are deductible for the employer – have been incurred wholly and exclusively for the purposes of the employer’s business
the amounts claimed do not include disallowable items
amounts claimed are reasonable and not excessive
a compliance officer other than the employee is responsible for monitoring
the checks involve specific activities and are carried out at such a regularity so as to ensure their effectiveness, in proportion to the size and complexity of the workforce and the business
employers inform and remind employees of the need to retain appropriate evidence for expenses such as receipts.
How to implement the checking system
HMRC’s EIM30275 shows basic checking models applicable to various business sizes. Although businesses do not need to follow those specific models and can have their own, following a selected model will ensure compliance with the new requirements.
Large employers, more than 1000 employees
Employees travel regularly
Bespoke or benchmark rates paid
Small employers, fewer than 100 employees
Employees travel regularly
Benchmark rates paid
Micro businesses, 1 employee
Benchmark rates paid
Random check of 10% of all expenses
Carried out for a duration of one month
Carried out every six months
Random check of 10% of all expenses
Claims vouched to employee diaries, work schedules and time sheets
Review of receipts carried out to show that circumstances applying when bespoke rates were agreed have not changed or to demonstrate that employees have in fact travelled if benchmark rates are paid
Receipts reviewed and retained for a period of 12 months from the date of expenditure
Diary and time sheets maintained
Sample of expenses subject to monthly checks by an independent third party
While complying with the checking system requirement may seem like another administrative burden, in practice basing the system on sampling proportionate to the number of employees and size of business means that large companies are likely to have resources to carry out the checks, and small businesses will most likely have to only need to carry out the checks when circumstances change, as the duration and frequency of checks is not defined.
The application of the exemption rules by one-man businesses may pose most difficulties, if the exact model was to be followed and the checking of expenses was to be carried out by ‘an independent third party’. It seems that as the models are exemplary and not mandatory, nominating ‘an independent third party’ is unlikely to be implemented for practical and confidentiality reasons.
It seems the easiest way to continue to benefit from the exemption to report certain benefits in kind on P11D, apart from the retention of receipts alone, especially for smaller businesses, is to have a formal written expense policy in place. In practice, a lot of businesses are likely to continue what they have always done, though in a more formal manner.
Having a written policy in place which can be shown as evidence to HMRC, following specific procedures, using formal expense claim forms, ensuring employees are fully aware of when they are eligible to make claims, as well as nominating an individual authorised to execute the checks, are the main requirements employers need to be aware of.