The legislation governing the assessability of expenses payments and benefits in kind provided to directors and to employees earning £8,500 p.a. or more is drawn in such a way that even the reimbursement of what would be an allowable expense is chargeable to tax in the first instance. It is for the employee to make a claim under ITEPA 2003, s. 336 for a deduction for the expenditure he incurred.
Clearly this procedure is cumbersome and leads to additional work for the employer, the employee and HMRC. It is possible, however, to avoid this by the employer seeking a dispensation under ITEPA 2003, s. 65 for any expenses payments made to directors or to employees paid at the rate of £8,500 p.a. or more to be treated as falling outside the rules which make them assessable, thereby making it unnecessary to make a claim for deduction.
To obtain a dispensation, it is necessary to provide the inspector with details of the cases and circumstances in which such expenses payments are made, and it would be only those payments which fall strictly within the terms of the dispensation which would be exempted from the rules. Dispensations are not normally given for entertaining expenses reimbursed or for round sum allowances.
The most common pitfall for those who obtain a dispensation is to fail to keep it up to date. Unless the circumstances in which the expenses are paid are exactly those covered by the dispensation, and unless the amounts paid are paid in accordance with the figures set out in it, it will be contended that the dispensation is no longer valid. While this may be of little or no consequence where the later payments are such that it is accepted that no further liability to tax arises, if a later inspector decides that the original dispensation was incorrectly given, he may try to seek arrears of tax and NIC from the date it was given. Where it is only the amounts reimbursed that have changed and it can be shown that there is still no profit element for the employee, this contention should be resisted.
It should also be noted that, strictly, a dispensation takes effect from the date the notice is issued by HMRC. Although it may be agreed by HMRC to permit the dispensation to take effect from the beginning of the tax year in which it was applied for, it cannot apply retrospectively to an earlier year.
It is HMRC policy to encourage employers to apply for dispensations (as a means of reducing paper work for employers and HMRC) and compliance officers are instructed that an application for dispensation by an employer is not in itself to be regarded as automatically triggering a review. Equally however, such cases are not automatically excluded from the field of review.
HMRC have published a leaflet (IR 69) entitled Expenses payments and benefits in kind: How to save yourself work, available free of charge from local tax offices.
To make dispensations more attractive to employers, it was announced on 30 November 1994 that dispensations would count for NICs as well as for tax.