Do you understand the impact of the changes on dispensations?

15 November 2016

It is important that employers are mindful of the ceasing of the dispensations for expenses and benefits from April 2016 and understand the new processes and procedures. There is widespread confusion over the treatment of round sum allowances and the need going forward to have either a bespoke or benchmark scale rate agreed with HMRC.  Employers involved are considering whether to move from paying a round sum to reimbursing costs incurred.

Whilst I wrote recently on this point we are seeing that there is still a considerable amount of misunderstanding over the changes which occurred at April 2016 in regard to dispensations. These misunderstandings are leading some employers to make clear errors over how they revise their procedures. I felt it was therefore essential to spell out the position

Historically an employer could approach HMRC and seek a dispensation which excused them the need to report this particular item on the respective employee’s form P11d (return of expenses and benefits).  It was generally the case that a dispensation would be granted on items which would not be taxable in the hands of the employee.  This would cover genuine expenses incurred in a business activity

The change from April 2016 removes dispensations and follows a review by the Office of Tax Simplification and consultation.  From April 2016 an employer takes the responsibility to decide whether a particular expense or benefit is taxable in the hands of the employee concerned.  If they believe it would be taxable then the item will need to be reported on the form P11d.  The important change from April 2016 is that the risk sits with the employer so if they make the wrong decision and do not report a particular expense or benefit which HMRC consider is taxable then they face a penalty.  It is therefore essential that employers understand this change and revise their systems and procedures accordingly

The above is not what is creating the confusion but more the position over the payment of round sum allowances.  Historically it was the case that many employers paid a round sum allowance for travel and subsistence costs rather than meeting the actual costs incurred by the employee.  This was widespread particularly across the public sector.  It was the case that if HMRC agreed that the amount being paid by the employer appeared reasonable against the likely costs incurred a dispensation would be granted.  Therefore this meant the amount in question was not taxed.  But given we now no longer have dispensations this practice is no longer present.

Going forward therefore those employers who wish to pay a round sum allowance will generally have to approach HMRC and obtain approval that the amounts in question can be paid tax free.  There are 2 new specific arrangements in place over the agreement of these allowances with one called ‘a bespoke scale rate’ and the other a ‘benchmark rate’.  There is detailed guidance in the Employment Income Manual of HMRC over the payment of the agreement of these sums tax free (see EIM30250 and vEIM30240).  Clearly to get HMRC agreement requires a fairly significant amount of effort on the part of the employer.  In my discussions with a number of employers they have decided given these new rules to stop the payment of a round sum allowance and move to reimbursing actual costs incurred but this represents a significant change of approach and it may not be well received by the employees

Clearly it would be dangerous for an employer to consider that given they had a historical dispensation that it is now safe to continue to make round sum allowance payments free of income tax and National Insurance without some written confirmation from HMRC

In our experience we are finding a significant number of employers are unaware of this significant change in the HMRC rules.

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