Until recently, reimbursed expenses were treated as earnings of the employee, reportable to HMRC (HM Revenue and Customs) on P11Ds. Employees would claim tax relief to the extent that they were qualifying business expenses. This convoluted process could be avoided if an employer was granted a dispensation from the current reporting obligations.
Abolition of P11D dispensations
As of 6 April 2016 P11D dispensations have been abolished and now such business expense will be covered by an exemption, subject to certain conditions being met. This is welcome news for those employers that did not have a dispensation agreement however the new legislation has made some important changes which all employers must be aware of.
Schools will commonly reimburse expenses incurred by employees in the course of their duties, such as for travel and subsistence, and sometimes expenses are paid for by the school directly to the provider. Understanding the new rules in these situations is important, to ensure ongoing compliance.
What does this mean for you?
- Expenses that fully meet the qualifying conditions will now be exempt and do not need reporting to HMRC on forms P11D.
- There is a statutory requirement for all employers to put in place a system under which employee expense claims are validated. Before reimbursing these to employees without deduction of income tax and NICs, they must be satisfied that the expense meets the conditions of the exemption.
- Bespoke round sum expense payments cannot be paid at a level higher than the published benchmark rates without prior agreement with HMRC.
- Where expenses are paid using the benchmark rates or a bespoke round sum expense payment agreed with HMRC, the checking process will require you to review expense claims against receipts using a sampling process. This brings back the administrative burden of retaining receipts and we must question whether such round sum payments are worth continuing.
- The new exemption will not apply to expenses that are paid in conjunction with a salary sacrifice arrangement?
What are the conditions for exemption?
The emphasis is solely on your board to determine whether the expense qualifies under the exemption. Not only must the board be satisfied that the expense has been incurred and paid by the employee but also that it would qualify for a deduction against earnings.
What if you get it wrong?
Reimbursed expenses that are not wholly exempt must be paid to the employee through the payroll under deduction of tax and NICs. If your school directly meets expenses that are not wholly exempt, these must be reported on forms P11D. Failure to make an accurate assessment will result in settling any unpaid tax and NICs with HMRC, along with interest and penalties. Schools are still being targeted heavily by HMRC for employer compliance checks and adoption of these new rules will be included in such reviews.
What should you do?
These changes mean that the procedures and processes you currently use when paying expenses need to be reviewed with the following in mind:
- where round sum allowances are paid, employers must ensure that they have advance HMRC agreement to payments that exceed the benchmark rates;
- appropriate checking processes must be in place to sample check round sum payments against expenses incurred;
- even where specific reimbursements are made against receipts, employers must be satisfied through their checking processes that they relate to allowable business expenses;
- procedures should be detailed in an expense policy to ensure all employees are providing sufficient information to enable the employer to determine that the conditions that make an expense exempt are met;
- those responsible for validating expenses should be made fully aware of what represents allowable business expenses.
With the protection of the dispensation withdrawn, responsibility sits with the employer to assess expenses and decide whether they are exempt. It is a good time for your school to review their expense procedures to ensure that you have processes that are robust and to consider the changes required to remain compliant in the post dispensation era.