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.

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.

A recent tribunal case was heard concerning the benefit in kind rules on beneficial loans to employees (Mrs E Amri v HMRC).  In what may be a more unusual situation, the case concerned an individual who was employed by a bank and was provided with loans with two different interest rates.

Background and Facts

The taxpayer was provided with two loans from the bank that she worked for, one for £35,000 at 5.5%, which was the Bank of England base rate at the time, and another for £105,000 at 6.24%.

The HMRC official rate of interest for beneficial loans at the time was 6.25%.

The smaller loan was a staff loan whilst the larger loan was provided at the bank’s normal commercial rate.

HMRC enquired into Mrs Amri’s return, and argued that the whole sum received should be treated as one loan and taxed as a benefit in kind.  By using the averaging method for calculating the loan, Mrs Armi was deemed by HMRC to have incurred a much higher benefit that she would have done on the £35,000 loan.

Arguments and Decision

HMRC argued that all sums advanced by reason of employment were covered by ITEPA 2003, s.173(2)(a).  As HMRC argued the amount advances were a single loan, this would mean that the whole loan was subject to a benefit in kind tax charge based on the average rate.

The taxpayer appealed on the basis that the two loans were distinct and as a result the loan of £105,000 was exempt by virtue of ITEPA 2003, s.176 as comparable loans could be taken by members of the public.

The tribunal agreed with the taxpayer and refuted HMRC’s argument that there was only one loan, allowing her appeal.  It was noted that HMRC had not provided any real evidence that there was only one loan, and Mrs Amri had stated that different terms applied to each.

Comment

The decision appears to be fair and common-sense.  What is more surprising is that the taxpayer was forced to take the case to tribunal to get the desired outcome and highlights the continuing trend of HMRC adopting aggressive stances where it is hard to identify the “mischief” they are targeting.

The First-Tier Tribunal has recently heard the case J Flanagan v HMRC (TC02161).

An employee of RBS plc took out a mortgage with his employer.  The terms of the mortgage were better than those available to normal RBS customers.

HMRC assessed Mr Flanagan with tax on a benefit in kind through the provision of a “Cheap Loan” by his employer (ITEPA s175), because the rate of interest was lower than the official rate determined by HMRC.

Mr Flanagan appealed on the basis that there were mortgages available in the open market with a lower interest rate than the official rate.

In upholding HMRC’s assessment the Judge had sympathy for the appellant but stated that under the rules tax was technically and correctly due.

Bank employees beware!

Top Tax Tips for Owner Managed Businesses
8. Tax Free Employee Benefits
Tax free benefits are a great way to incentivise staff and are tax efficient from the point of view of the company.
Examples of tax efficient benefits include:

  • Provision of one mobile phone per employee, – HMRC have now confirmed that i-phones and smart phones will be treated as mobile phones and not computers,
  • Free or subsidised meals provided on the employers’ business premises,
  • Annual function (such as Christmas party) – up to £150 per head,
  • Long service awards of up to £50 for each year’s service where employees have worked for their employer for more than 20 years,
  • Workplace parking spaces,
  • Provision of works buses with seating capacity of 9 or more,
  • Up to £8,000 of qualifying removal expenses,
  • One health screening or medical check up,
  • Childcare facilities where the employer is at least partly responsible for the financing and management of the facilities,
  • The provision of loans up to £5,000