end of year dispensations Don’t dispense with a dispensation
Lesley Fidler, Associate director at Baker Tilly, provides timely reminder that the end of the tax year is an important date for those who need to update, renew or apply for a dispensation
T
he basic structure of the tax system for employee expenses is that any money moving from employer to employee needs either to have been paid via the payroll or shown on the P11D return. (Where there is no doubt that the expenses are taxable – for example, reimbursement of ordinary commuting – the employer should be payrolling such cash payments and not paying them gross at all.) Were it not for additional legislative provisions, it would clearly be unfair that employees should have to pay income tax and/or national insurance contributions (NICs) on money that is no more than the reimbursement of out-of-pocket business expenses that they have paid-out on behalf of their employer.
Employees can make claims for tax relief so that the amount is deducted from their taxable income. This can be done by claiming that they have spent the money ‘wholly, exclusively and necessarily in the performance of the duties of the employment’ or that the expenses were ‘necessarily incurred on travelling in the performance of the duties of the employment.’ Employees can make claims via form P87 (
www.hmrc.gov.uk/forms/ p87.pdf). The result is a self-cancelling exercise – the employer enters the reimbursed expenses on the P11D return, they become part of the employee’s total taxable income, and then the employee claims tax relief for those expenses so they are deducted from the taxable total. Result – a lot of form filling (or on- screen completion) and administration for employers, HM Revenue & Customs (HMRC) and employees but no more (or less) tax or NICs paid overall. To avoid this waste of time and effort, section 65 of the Income Tax (Earnings
in question. The standard method of applying for a dispensation is now to complete form P11DX. This can be done online, or the form can be printed out and completed manually. Whichever route the employer chooses, the opportunity to explain and discuss employer-specific issues has largely disappeared.
and Pensions) Act 2003 permits HMRC to give employers dispensations from reporting certain expenses and benefits. A dispensation is a “notice stating that an officer of Revenue and Customs agrees that no additional tax is payable … by reference to the payments, benefits or facilities mentioned in the statement supplied by [the employer].” The term ‘dispensation’ refers to the employer being able to dispense with the statutory requirement to return certain expenses on P11D returns. HMRC is keen to encourage dispensations because it reduces the volume of P11D data and consequent employee claims that it needs to process. Employers should be aware that, without a dispensation that covers the particular type of expenditure, reimbursed expenses should be shown on returns P11D, even though they do not, generally, attract a Class 1A NICs charge. Strictly, a dispensation takes effect from the date on which it is granted but this would, in almost all cases, result in the employer having to show expenses on P11D returns for part years – an even more burdensome exercise. Consequently, HMRC accepts that a dispensation can take effect from the start of the tax year in which the application is made. The tax year end time limit means that by the time P11D completion is being undertaken, it is too late to get a dispensation for the year
...THE OPPORTUNITY TO EXPLAIN AND DISCUSS EMPLOYER-SPECIFIC ISSUES HAS LARGELY DISAPPEARED
At one time, dispensation applications were dealt with by local employer compliance specialists within HMRC and they were an ideal opportunity for employers to discuss ‘grey’ areas with HMRC and reach a workable treatment. Now, however, dispensation work has been centralised within HMRC. If the dispensation application contains unusual issues they are either refused or, if the employer has a client relationship manager (CRM), the employer is referred back to HMRC’s employment taxes specialist appointed by the CRM. For those employers without a CRM, they are left with yet another issue on which to make a decision. Only if the matter is particularly significant or relates to recent legislation is there scope for using HMRC’s non-statutory clearance process (see
www.hmrc.gov.uk/cap/nscg.htm).
PP
Suggested checklist for applying for a dispensation: l A written, current, expenses policy that has been drafted and implemented with regard to tax and NICs rules. VAT is a separate issue, but should not be ignored. l A robust and effective process for checking and monitoring employees’ expenses claims and recovering any advances made towards expenses not yet incurred must be in place. l Evidence of approval of claims by a suitably senior colleague (at board level, this should be another board member). l Supporting evidence (usually receipts) to show that the claimed expenditure has been incurred. l Completion and submission of form P11DX before 5 April (effectively Friday 4 April in 2014).
PayrollProfessional 39
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