PAYE Exemptions and Dispensations

During April 2016 the laws on dispensations changed; they have now been replaced with exemptions. Over twelve months later, there is still confusion over the appropriate way to handle expenses. 
 
You can no longer apply for dispensations, but what expenses are covered by exemption?
 
Firstly, to qualify for exemption you must either:

  • Pay a flat rate to your employees as part of their wages. This can be either a benchmark rate or a rate agreed by the HMRC
  • Pay back the employees' actual costs.  

If you qualify for exemption you do not have to report the following expenses, they are covered by exemption:

  • Business travel
  • Phone bills
  • Business entertainment expenses
  • Uniform and tools for work

All other expenses and benefits should be reported to HMRC and the correct amount of tax and National Insurance should be paid. You can find a detailed list of all expenses and benefits here on the HMRC website. 
 
Although you cannot apply for new dispensations, any bespoke rates agreed with the HMRC between 6th April 2011 and 5th April 2016 as part of your dispensation can be used for up to 5 years from their agreed date if you apply to do so. You can find the application form here on the HMRC website.
 
What about partially exempt expenses and benefits? For partially exempt expenses the qualified exempt amount can be paid by the employer, the rest is to be reported on a P11D form. However, partial benefits do not qualify for exemption and must be reported on the P11D form.
 
In addition to the abolition of dispensations, businesses are now required to have an expenses validation process in place. An expense claim needs to be verified as being compliant with the exemption before being reimbursed. In the case of the benchmark and bespoke HRMC sums, expenses payments must be checked against receipts. 
So what do you need to do to remain compliant? 
 
Review your expenses and benefits to obtain whether they are suitable for exemption. 

  • Employ a good ethic of collecting suitable information on expenses from staff. 
  • Train your staff on the different expense types and their different validation requirements.
  • Ensure partly exempt expenses and benefits are handled correctly.