Changes to Tax Benefits and Expenses Rules – Reminder

From April 2016 the rules on reporting of expenses and benefits are due to be reformed.

Previously, expenses reimbursed to employees that were wholly, exclusively and necessarily incurred by the employee in the performance of their duties were treated as an allowable expense for the employee; however the payment of the expense was treated as a benefit. Historically, such matters have required reporting on Form P11D, or to be covered in advance via a written dispensation from reporting, agreed in writing with HMRC. As there was no overall tax liability in such instances, HMRC allowed companies to agree dispensations for certain expenses which did not need to be reported in this manner.

The whole of this system is being abolished, and a new one imposed. From April 2016, it is proposed that existing dispensations will no longer be in force. Instead, where an employee is entitled to a fully matching tax deduction, employers will no longer have to apply for a dispensation, or report those expenses on form P11D. In theory this may cut back on reporting for the future, but HMRC expect there to be an underlying checking mechanism. If this is not in place and also formally verifiable then tax penalties may be imposed.

There is also a change to the way bespoke, pre-negotiated rates for expenses work. A new exemption will provide an option for employers to agree a scale rate with HMRC where they do not want to use the benchmark rates. These bespoke rates can be used for up to five years.

In order to apply for a bespoke rate, employers will need to provide HMRC with evidence, based on a sampling exercise, to demonstrate that the proposed rates are a reasonable estimate of the expenses actually incurred by the organisation’s employees.

It would certainly be prudent for employers to review any existing dispensations which are in place prior to 6 April 2016 and to consider any changes that may be required to be made to processes to ensure that expense payments are dealt with correctly from April 2016 onwards. We have prepared a questionnaire for employers to use to ascertain what steps might be needed and would be delighted to speak to you if you would like our assistance.

Private Expenditure and The Importance of Keeping Records

A recent tribunal case (D White v HMRC) again highlighted the importance of keeping accurate records for tax purposes, this time in a case involving private expenditure on a company credit card.

The Director used the card for both business and private expenditure, but there were no accurate records to enable them to determine the amount of private expenditure.  HMRC therefore argued that the Director’s loan account was incorrect and raised assessments under the rules on cash equivalent of benefits treated as earnings.

The taxpayer appealed against the assessments but had no evidence to show that the HMRC figures were incorrect.  There was nothing to show that private expenditure had been reimbursed, or that the director’s loan account had been suitable adjusted.

The tribunal had no choice but to dismiss the appeal.  This shows the importance of keeping accurate records as, once HMRC have raised an assessment, it is generally up to the taxpayer to prove that they are not correct.  This can be difficult if the records are not sufficient to do so.

Wholly and exclusively test and duality of purpose – Healy v CRC

The rules on whether expenditure may be allowed as a deduction under the ‘wholly and exclusively’ principles can often be contentious.  This is demonstrated by the number of cases taken to the courts to determine such disagreements.

The recent Upper Tier Tribunal case of Healy v CRC has added further material to the case law on the subject, and due to the outcome promises more to come as it has been referred back to the First Tier Tribunal.

The case concerned professional actor, Tim Healy, and whether or not the cost of his accommodation in London was an allowable expense.  The First-tier Tribunal had allowed his original appeal on the basis that he had not been looking for a permanent home in London.

HMRC appealed, arguing that the tribunal had erred in law by ignoring whether or not Mr Healy had a duality of purpose when incurring the costs as it met the need for warmth and shelter than he ordinarily had.

The Upper Tier Tribunal agreed that by failing to address this point the Tribunal had erred in law.  Based on the facts available to them, they did not have the necessary detail to determine the case.  It was therefore remitted to the First-tier Tribunal for a new hearing.

The outcome of the re-heard case could have wider implications for the self-employed and so it will be interesting to see how the case develops.  In the meantime, it is important to take care in this area and take each case on its own merits.

HMRC Wins Important Business Travel Expenses Case: Dr Samadian

A recent test case was heard by the tax tribunal regarding whether certain business travel expenses were allowable, in terms of the interpretation of the “wholly and exclusively” rules.

Summary

Dr Samadian worked full time as an employee for the NHS at two hospitals in London and had a permanent NHS office. He also worked at two private hospitals holding weekly out-patient sessions.

The tribunal acknowledged that Dr Samadian had a dedicated office in his home which was necessary for his professional activity; however the Tribunal did not accept that Dr Samadian’s home office could be treated as the start for calculating his allowable private practice business mileage for habitual journeys.

The decision could potentially have an impact on all self-employed professions in cases where there is a home office and another business base from which they operate on a regular basis.

Taxpayer’s Case

The taxpayer argued that the business base should be regarded as the place from which the business is run and not the place where the professional services are carried out (as was argued by HMRC).

In particular the taxpayer said there was no general principle that meant any travel to/from a taxpayer’s home must always be disallowable due to having an element of non-business duality. He said that each case should be judged on its own facts.

The taxpayer submitted that on the facts, his home was the business base and therefore there was no non-business purpose in his travel between the home and the private hospitals.

HMRC’s Case

HMRC’s argument was that the cost of travelling to and from home and a place of work is generally not allowable as the journeys are not wholly and exclusively for business.

The motive, object and purpose of Dr Samadian’s disputed journeys were to take him from his home, where he lives, and to then undo this journey.

Past Cases Considered

The tribunal considered various cases put forward by the taxpayer and HMRC, however rather unusually they also considered an additional case – Mallalieu v Drummond, with a view to explain the statutory words “expended for the purposes of the trade”.

Mallalieu related to a claim for professional clothing for use in court by a barrister. The tribunal concluded that this claim had failed “because although she had conscious motive for incurring the expenditure which was not a business motive, the facts were such that there must necessarily have been a non-business motive in her mind as well”

The judge felt this case made it clear that it was possible for him to “look behind the conscious motive of a taxpayer where the facts are such that an unconscious object should also be inferred”.

Tribunal Ruling

The tribunal accepted that Dr Samadian has a place of business at home, but there must have been a “mixed object” in the travelling between home and the private hospitals, because part of the object of the journeys must “inescapably” be to maintain a home in a separate location.

The journeys between the NHS hospitals and the private hospitals were also regarded as non-deductible by the panel on the grounds that “the object of the travel is to put the appellant into a position where he can carry on his business away from his place of employment; the travel is not an integral part of the business itself”.