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Employers: don’t throw away your dispensations just yet….

By Lesley Stalker on 29 March 2016

Currently any employer that has a dispensation in place is able to avoid having to report the precise details of routine business expenses reimbursed to employees, e.g travel and subsistence and entertaining costs. After 6 April the system is changing and dispensations will be replaced with an automatic statutory exemption for all paid and reimbursed expenses.

However this doesn’t mean that the dispensation is completely obsolete.

It is possible for HMRC to enquire into periods for up to four years and therefore the dispensation should be retained in the event its required to support prior year expense reporting.

In addition, where bespoke scale rates have been agreed with HMRC and are included within the dispensation, for these to remain valid after 6 April it is necessary to agree them again with HMRC in advance of making any such payments post 6 April; (to do so without agreeing the bespoke rates in advance will incur a tax and NI liability for both employee and employer). Where a dispensation including bespoke scale rates is less than 5 years old HMRC have advised that there is a fast track application that can be used to have these rates confirmed i.e without the need to go through the sampling process that was required when the rates were first agreed.

The new, dispensation free regime, includes some set reimbursement rates that employers can use. The first is the 45p per mile mileage rate for drivers who use their own cars for a qualifying business journey and also benchmark subsistence rates which can be used where the qualifying travel criteria is met.

What are the new benchmark subsistence rates?

Minimum journey time Maximum subsistence allowance (food and drink) Supplement (if journey lasts beyond 8pm)
5 hours £5 £10
10 hours £10 £10
15 hours £15 N/A

The rates outlined above are the maximum that an employer can pay without incurring additional tax or NICs (national insurance contributions).

If an employer wishes to pay less than these published amounts, the employee may claim a tax deduction from HMRC on the difference between the actual cost incurred and the amount their employer is willing to reimburse as a business expense.

If an employer wishes to pay more than the published maximum amount, they must either agree an alternative scale rate with HMRC in advance to qualify under the terms of the automatic statutory exemption, or pay the extra tax and NICs incurred separately.

Are there any exceptions to the automatic statutory exemption?

Certain industries e.g. construction, are covered by Working Rule Agreements and excluded from the expenses pay scale rates.

What action should employers take now?

If you pay your employees’ a flat rate expense amount during business travel and wish to make payments that exceed HMRC’s benchmark rates during the 2016/2017 tax year, it will be necessary to apply for an Approval Notice before 6 April 2016 to avoid having to start from scratch and revisiting the sampling process again.

Last but not least, whilst dispensations will soon be disappearing the requirement for an employer to maintain adequate checking systems to ensure that only genuine and qualifying business expenses are reimbursed does not. What constitutes a genuine business expense and what HMRC consider to be an adequate checking system is something that catches many employers out and can lead to an unexpected tax bill in the event of an enquiry or visit.

Employers should review their expenses policy including the controls over the amounts and nature of expenses reimbursed to make sure HMRC requirements are satisfied.

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Currently any employer that has a dispensation in place is able to avoid having to report the precise details of routine business expenses reimbursed to employees, e.g travel and subsistence and entertaining costs. After 6 April the system is changing and dispensations will be replaced with an automatic statutory exemption for all paid and reimbursed expenses.

However this doesn’t mean that the dispensation is completely obsolete.

It is possible for HMRC to enquire into periods for up to four years and therefore the dispensation should be retained in the event its required to support prior year expense reporting.

In addition, where bespoke scale rates have been agreed with HMRC and are included within the dispensation, for these to remain valid after 6 April it is necessary to agree them again with HMRC in advance of making any such payments post 6 April; (to do so without agreeing the bespoke rates in advance will incur a tax and NI liability for both employee and employer). Where a dispensation including bespoke scale rates is less than 5 years old HMRC have advised that there is a fast track application that can be used to have these rates confirmed i.e without the need to go through the sampling process that was required when the rates were first agreed.

The new, dispensation free regime, includes some set reimbursement rates that employers can use. The first is the 45p per mile mileage rate for drivers who use their own cars for a qualifying business journey and also benchmark subsistence rates which can be used where the qualifying travel criteria is met.

What are the new benchmark subsistence rates?

Minimum journey time Maximum subsistence allowance (food and drink) Supplement (if journey lasts beyond 8pm)
5 hours £5 £10
10 hours £10 £10
15 hours £15 N/A

The rates outlined above are the maximum that an employer can pay without incurring additional tax or NICs (national insurance contributions).

If an employer wishes to pay less than these published amounts, the employee may claim a tax deduction from HMRC on the difference between the actual cost incurred and the amount their employer is willing to reimburse as a business expense.

If an employer wishes to pay more than the published maximum amount, they must either agree an alternative scale rate with HMRC in advance to qualify under the terms of the automatic statutory exemption, or pay the extra tax and NICs incurred separately.

Are there any exceptions to the automatic statutory exemption?

Certain industries e.g. construction, are covered by Working Rule Agreements and excluded from the expenses pay scale rates.

What action should employers take now?

If you pay your employees’ a flat rate expense amount during business travel and wish to make payments that exceed HMRC’s benchmark rates during the 2016/2017 tax year, it will be necessary to apply for an Approval Notice before 6 April 2016 to avoid having to start from scratch and revisiting the sampling process again.

Last but not least, whilst dispensations will soon be disappearing the requirement for an employer to maintain adequate checking systems to ensure that only genuine and qualifying business expenses are reimbursed does not. What constitutes a genuine business expense and what HMRC consider to be an adequate checking system is something that catches many employers out and can lead to an unexpected tax bill in the event of an enquiry or visit.

Employers should review their expenses policy including the controls over the amounts and nature of expenses reimbursed to make sure HMRC requirements are satisfied.