EXPENSES - 04.05.2016

New expenses rule - is a P11D needed for 2015/16?

Job expenses and the new rules

You probably know that since 6 April 2016 certain job-related expenses paid for, or reimbursed to, employees are exempt from tax and NI. The exemption will most often apply to business travel, subsistence, entertainment and subscriptions, but isn’t limited to these (see The next step ). The trouble for one of our subscribers was that expenses were reimbursed in 2016/17, but related to 2015/16.

What’s the problem?

Many employers will face the situation described above when preparing P11Ds for 2015/16. You might ask why it matters. The answer is that apart from wanting to get it right, there’s potential for tax to inadvertently be avoided. If HMRC picks this up it could reflect badly on your company.

How is tax avoided?

Under the rules which applied up to 5 April 2016 employees (that includes directors) are taxable on expenses reimbursed to them, but can make a claim for a tax deduction for costs incurred in the course of doing their job. Under the new rules expenses reimbursed since 6 April 2016 are exempt. That might mean an employee is entitled to a tax deduction under the old rules for expenses that are exempt under the new rules.

Example. James is a director of Acom Ltd. In April 2016 he claims expenses for business travel costs for February and March 2016 of £2,000. Acom pays him £2,000 in May 2016. James correctly claims a tax deduction for the £2,000 on his 2015/16 self-assessment tax return. Acom also correctly does not report the expenses on James’s 2015/16 P11D because the expenses were reimbursed in 2016/17 (at which time they are tax exempt). James therefore receives a tax deduction on £2,000 of expenses even though after taking account of the reimbursement he’s received from Acom, there will be no cost to him.

What’s the answer?

We’ve asked HMRC what an employer should do in this situation, but so far haven’t received a response. Therefore, we suggest the following.

Tip 1. If you have reported expenses claimed by employees on Forms P11Ds for the year to which they relate, rather than the year in which you reimbursed them, continue with that practice. This will ensure there’s no accidental tax avoidance.

Tip 2. If you’ve stuck to the rules and reported expenses in the year that you reimbursed them then take either one of two steps:

• when you pass the P11D details to the employee to report on their 2015/16 tax return attach a note identifying the amount of expenses they should not claim on their tax return because they’ve been exempted under the new rules; or
• tell the employee to claim a tax deduction for the expense on their 2015/16 tax return, but be aware that there will be a corresponding tax charge for 2016/17 when you report the expense on the P11D for that year.

For a link to HMRC’s guidance on the new exemption, visit http://tipsandadvice-tax.co.uk/download (TX 16.15.06).