P11D Expense Reporting Changes Coming for UK Employers
By Katie Davies, Senior Director, Radius
Starting in April, businesses operating in the UK will enjoy greater self-regulation when reporting employee expense reimbursements. And while any kind of deregulation is typically welcomed by businesses, UK employers must be wary in this instance, since the principles dictating what is reportable (and hence taxable) haven’t changed. In short, there is no relaxation in what needs to be reported. Companies still must have robust, compliant expense policies and financial controls in place, including collecting data on the nature of all reimbursed employee expenses.
Currently, employers must file a form P11D at the end of every fiscal year for each employee earning over £8,500. The form P11D is used to report benefits and reimbursed employee expenses that are not recorded or otherwise taxed via a company’s payroll.
Under current UK tax rules, employers can obtain an exemption — called a “dispensation” — from reporting many routine business-related expenses (such as travel, phone calls and entertainment) that UK tax authorities deem “wholly, necessarily and exclusively” for business purposes, and no element of personal enjoyment exists. Employers must apply in advance to HM Revenue & Customs (HMRC) for a dispensation. As part of this process, HMRC has the right to request details pertaining to the employer’s expense reimbursement policy and financial control procedures.
No more. On April 6, 2016, a new law will end the era of “P11D dispensations.” Employers will be allowed to “self-determine” which reimbursed expenses must be disclosed. (Employee benefits will be reported in the usual way.)
The change was recommended by the Office of Tax Simplification, which is also where you will find information about expenses and benefits that need to be reported. After many deliberations and committee meetings, the government incorporated the recommendation into the Finance Act 2015, which you can read online if you’re interested.
No More Security Blanket
The end of P11D dispensations will result in less work for employers in at least one area — they will no longer have to formally apply for dispensations and keep those dispensations current. However, removing dispensations also removes related guidelines that give clarity on which expenses are pre-approved as exempted from reporting. After April 6, employers will have to decide on their own whether they must report various types of expenses on form P11D.
Under the new rules, the main drawback for employers will be the loss of a sense of security. Employers who now receive a P11D dispensation from HMRC have a pre-agreed framework for which expenses are deemed reportable and taxable and which are not. Furthermore, the current process imposes a “forced” discipline, ensuring that an employer’s expense policy complies with current legislation — and is adhered to through financial controls — at the time of the initial application and subsequent renewal of the dispensation. The new process will introduce uncertainty as to what is reportable and taxable, and every year financial teams will need to assess what is reportable. This will add not only ambiguity but also administrative burdens, and may make employers nervous as they try to navigate UK expense classifications.
Under the new reporting rules, it is essential that companies implement a robust, up-to-date and UK-compliant expense reimbursement policy and accompanying processes. The expense policy should reasonably define what expenses are not “wholly, necessarily and exclusively” for business purposes and exclude those from the reimbursement process. This is easier said than done, and it can sometimes be difficult making determinations about certain kinds of expenses, such as those related to home office internet charges or mobile phone contracts.
No More Income Threshold
The new law also abolishes the £8,500 employee-income threshold, meaning that expenses and benefits for all employees, regardless of income, will need to be reported. The Office of Tax Simplification says this will save employers time and administrative costs by eliminating the need to identify which employees qualify.
With passage of the new Act, having robust accounting and expense reimbursement processes and policies in place will be more important than ever. It will also be critical to have a team that is trained and capable of making year-end P11D determinations of reportable expenses and preparing the necessary forms.