The government intends to reform the tax rules on employee expenses. Its first step is to ask employers about the policies and systems. Will this involve more work for you?
Changes ahead. The government has been angling for changes to the rules for employee expenses for several years. It now seems that those made in April 2016 were the tip of the iceberg ( yr.16, iss.6, pg.4 , see below ). However, before going ahead with a consultation followed by legislation, as is usual, the government is first calling for information from employers about how the current system operates in practice (see The next step ).
Extra tax? The document promises that “The government has no plans to remove the relief on employee expenses.” In our view the statement is probably disingenuous given that a few lines earlier it says “there has been a 25% increase in claims between 2009-10 and 2014-15. It [the government] wants to know why this has happened.” There are some obvious causes; for example, the number of employees working from home has increased significantly. We expect the government knows that, but it’s looking for evidence to confirm this.
Questions. Getting involved is voluntary, and while the document includes 17 questions for employers, you can pick and choose which you answer. The type of information requested mainly relates to:
- employers’ policies on staff expenses
- the types of expenses paid
- changes in expense patterns in recent years; and
- your view on how the rules on expenses should change.
Get involved. As an employer, this is something we think you should get involved in while it’s at an early stage, i.e. before HMRC gets hold of it and turns it into a crusade to collect more tax and in the process creates yet more admin for you and your workers.
Providing information is voluntary, so there’s no extra work unless you choose to get involved. However, in our view it will be worthwhile doing so. You can provide as little or as much information as you see fit.
BENEFITS AND EXPENSES
Are you ready for expenses reform?
On 6 April 2016 major changes to the tax rules for business expenses paid by employers will take effect. What are they and what steps should you be taking to prepare your business?
The existing expenses regime
The tax treatment of employment expenses paid or reimbursed to employees (including directors) has been the same for decades. Business expenses paid to or on behalf of employees count as taxable income (but are not liable to PAYE tax and NI). The employer must report expenses to HMRC on Forms P11D and employees declare them as income on their tax returns and, on the same form, claim a tax deduction. The net result is that employees pay neither tax nor NI on expenses. But getting to that position involves a great deal of hassle and form-filling. All that is set to change from 6 April 2016.
The exception will become the rule
As an employer, you can apply for a dispensation from the rules described above, which means you don’t have to report expenses on P11Ds and your employees don’t have to worry about declaring them or claiming a tax deduction. As a safeguard HMRC only grants a dispensation for genuine business expenses that your employees would be entitled to claim a tax deduction for had the dispensation not applied. From 6 April 2016 dispensations will be scrapped. Instead, all employers must deal with expense payments as if they had been granted a dispensation.
By 6 April 2016, you will need a system for checking that only genuine business expenses are paid without applying PAYE tax and NI. HMRC will publish further guidance on the type of expenses to which the new rules apply, but our guide provides details now (see The next step ).
Trap. The new rules won’t apply to expenses provided under a salary sacrifice scheme.
Example. Let’s say you pay employees tax-free travel expenses in exchange for them giving up part of their salary. From 6 April 2016 you must treat the payment as pay and deduct PAYE tax and NI. Employees can then claim a tax deduction for the actual costs they incur in relation to their business travel, but the NI won’t be affected.
Flat subsistence expenses
HMRC allows you to pay your employees a tax and NI-free flat rate amount to cover the cost of food and drink while they are away from their normal place of work on business. The good news is that these so-called benchmark scale rates won’t be adversely affected by the new rules (see The next step ). Neither tax nor NI is payable where you pay employees the benchmark rate or reimburse their actual subsistence costs.
Tip 1. The advantage of paying the benchmark rates is that you don’t need to obtain and keep specific evidence, i.e. receipts, from your employees to back up their claim for the subsistence expenses.
Tip 2. The new rules also allow you to agree a higher scale subsistence rate with HMRC if you consider the benchmark to be insufficient. These bespoke rates can be used for up to five years. You must provide it with evidence, based on a sample of employees’ expenses claims. Details on how to apply to use bespoke rates will be published before April 2016. We’ll keep you informed.
Payments or reimbursements you make to employees for business expenses after 5 April 2016 won’t be reportable on Forms P11D. But you’ll need a system to check employees’ expenses claims are incurred for genuine business reasons. To simplify the system HMRC will agree to pre-approved subsistence payments.