From April 2016, the P11D reporting dispensation has been revoked and replaced with a business exemption. Employers can no longer rely on any previous dispensation; instead, business expenses previously covered by a dispensation are now exempted by statute. In light of this, employers should take action before the end of the tax year to help reduce the burden of P11D reporting at the end of the tax year.
HMRC now expects employers to self-police their employee expense claims. Guidance has been published by detailing HMRC’s updated expectations in relation to employee expense claims, processes and procedures.
Employers should ensure they have the following in place and on record for the 2016/17 tax year:
- a written expense claim procedure available to all employees;
- a written expenses policy;
- a standard expense claim form/suitable expense software; and
- a clear authorisation process included in expenses policy.
Employers are expected to review their expense systems, processes and procedures in light of HMRC’s guidance. Adequate tax training should also be provided to key personnel dealing with expense claims to allow them to apply the correct tax treatment for benefits and expenses. This will ensure that the business exemption is applied correctly when completing year end P11D reporting.
Benchmark and bespoke rates
If benchmark and bespoke rates for specified expenses were used previously under the dispensation regime, from April 2016 these rates should have been re-agreed with HMRC.
Checking systems must also be in place for all employers using agreed benchmark or bespoke rates. The level of checks depends on the size of the workforce in question. The checking models outlined by HMRC have been broken down as follows.
- Model A – large employer with over 1000 employees reimbursed at bespoke rates – 10 per cent of all expense claims every 6 months.
- Model B – large employer with less than 1000 employees reimbursed at benchmark rates – 10 per cent of all expense claims every 6 months.
- Model C – small employer with less than 100 employees reimbursed at benchmark rates – 10 per cent of all claims.
- Model D – one man company reimbursed at benchmark rates– independent third party performs monthly check of expense claim sample.
HMRC expects employees to retain all receipts relating to claims for benchmark or bespoke rates to confirm that actual costs were incurred. In addition, checks of expenses should include references to employee diaries, work schedules and time sheets to confirm that the costs were incurred in the performance of the employee’s duties.
In preparation for P11D reporting for 2016/17, it is important that employers undertake reviews of their employee expenses before the end of the tax year to allow for changes and adjustments to be made where necessary. For example, certain expenses such as employee’s personal mobile phones or Broadband expenses may have to be taxed via the payroll and such adjustments will need to be made through payroll by March 2017.
Employers should be aware that HMRC has stated that it would expect to see evidence of the above control checks if it were to undertake a PAYE review.
For more information please get in touch with David Williams-Richardson.