P11D Dispensations have been around for many years and are one of the most useful tools for employers of all shapes and sizes in the battle to be PAYE compliant.

However, things are changing on the Dispensation front in terms of HMRC's attitude and approach to granting them and many employers are now finding that their Dispensation agreements are perhaps not as robust as they thought. Over reliance on an ineffective Dispensation can be the trigger for a chunky settlement following a PAYE audit by HMRC and so it is vitally important that employers are aware of HMRC's current approach to hopefully avoid a major disaster further down the line.

The case for a P11D Dispensation

A P11D Dispensation is what we in the trade call a "no-brainer", i.e. it is a hugely positive thing to have in place:

  • Reduced admin for the employer (in terms of easier P11Ds at year-end)
  • Reduced admin for employees (not having to declare business expenses and a corresponding claim for tax relief on their tax returns)
  • Comfort for the employer that expenses within the Dispensation will not attract a charge to tax/NI (although see below on this)
  • A sign to HMRC that the employer is taking PAYE compliance seriously (not having a Dispensation can arguably trigger a PAYE audit)

Up until recently, once a P11D Dispensation was in place, an employer could forget about it for a few years in the knowledge that the Dispensation would hold firm unless and until there were any significant changes in tax legislation or with how they pay and process expenses.

However, that seems to be a dangerous game to play nowadays......

HMRC's new approach to agreeing P11D Dispensations

Two worrying trends have developed over recent months in how HMRC is responding to Dispensation applications and the fear is that this is coming from a change in policy at HMRC which, if that is true, will mean the new approach could become a permanent fixture to the detriment of all employers.

Forcing the use of form P11D(X)

We have written in the past about the dangers of using form P11D(X) to obtain a P11D Dispensation and we NEVER recommend employers go down this route. Our preferred method of applying for a Dispensation is a detailed "warts-n-all" letter with expenses policies etc attached.

However, we are seeing more and more cases where HMRC are insisting that form P11D(X) is submitted, irrespective of the size of employer or whether a P11D Dispensation is already in place for the employer. This has even been the case where a detailed letter has been submitted (along the lines of what we recommend) - HMRC has even gone as far as refusing to consider the detailed response in an attempt to force the employer to submit the (less detailed) form P11D(X). Madness !

You may be asking why would HMRC take this approach ? We'll come on to that in a minute but just one point on their refusal to accept anything other than form P11D(X) - no matter what the HMRC officer tells you (and believe us they will), there is absolutely nothing in legislation that either allows HMRC to force the use of P11D(X) nor that prevents a P11D Dispensation being requested any other way and so we are making a point of reminding HMRC of this whenever they try to go down the P11D(X) route.

Not challenging Dispensation applications

It always used to be the case that dialogue of some kind with HMRC was necessary before they agreed to a new P11D Dispensation. This may have been on clarifying the processes and procedures for expense reimbursement or around the merits of some payments qualifying as being free of tax and/or NI. It was not unusual for HMRC to be extremely pedantic on relatively small items that were included within the Dispensation application.

Not any more !! HMRC appears to be granting all Dispensations without any dialogue, questions or challenges. You may think this is a good thing but it's not !

Our understanding of this is that HMRC is pushing all the onus back on to the employer as to whether they believe the Dispensation is valid. The reason for this is (presumably) so that HMRC can easily revoke the Dispensation (which can be done retrospectively) if it turns out that certain items do not qualify for tax relief or, more likely, the level of control by the employer in processing expenses falls way short of what is expected for a valid Dispensation to be granted. This in turn will swell HMRC's coffers when doing PAYE audits.

Which brings us back to the P11D(X) form. Again, we can only presume that HMRC is wanting all employers to go down this route when applying for Dispensations so that a) they can process the application easier from their end and b) to remove all responsibility on HMRC to check that the Dispensation is valid before it is used - which is much harder for them to do when a letter is in front of them formally asking their upfront agreement on specific points.

Conclusion

In some way we can understand HMRC's desire to put more responsibility back on to employers around Dispensations. Far too many in our opinion obtain Dispensations under false pretences (i.e. by having inadequate expense processes) or fail to keep Dispensations up to date in the belief that they are "covered" until the end of time.

However, HMRC's current approach is not helpful and will likely lead to many Dispensations being completely useless (of which the employer would be unware of until it was too late) which could end up costing employers a lot of money further down the line when  HMRC challenge the payment and reporting of staff expenses during a PAYE audit or enquiry.

In light of this latest turn of events, it is even more important for employers to apply for P11D Dispensations the "right" way, and with proper advice, to ensure that their Dispensation is effective and robust for the longer term. Failure to do so could result in a Dispensation that is not worth the paper it is written on, leaving the employer open to all sorts of challenges on incomplete/incorrect P11Ds, additional liabilities, interest charges and tax penalties.

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