Statement by HM Revenue & Customs

Pay Day by Pay Day Tax Relief Models and Dispensations

Who should read this statement

All umbrella companies, employment businesses, labour providers and employers engaging and paying temporary workers.

Pay Day by Pay Day Tax Relief Models

HM Revenue & Customs (HMRC) published a statement in July 2011 on the subject of Pay Day by Pay Day Tax Relief Models, also given other titles including Pay Day Relief Models. That statement set out HMRC's view that the granting of tax and National Insurance "relief" by an employer each pay day is not compliant with tax and Social Security legislation.     

Dispensations

This further statement focuses on the use of Dispensations, particularly in the context of Pay Day by Pay Day Tax Relief Models and other arrangements where expenses are not reimbursed but tax "relief" is claimed to be administered each pay day by the employer to reflect expenses incurred by the employee.

Dispensations are intended to remove the requirement for employers to report certain payments of expenses and benefits at the end of the tax year on forms P11D or P9D. They also remove the need to pay any additional tax which would otherwise be due on payments or benefits covered by a Dispensation. The removal of these requirements only applies to the payments and benefits included in the Dispensation. Employers must continue to report any expenses or benefits not included in a Dispensation in the appropriate manner and pay any additional tax due. Where a dispensation has been issued in respect of Travelling & Subsistence payments, and an employer separately and distinctly makes such a payment, it may be assumed that the payment will be disregarded for national insurance (NICs) purposes.

A Dispensation can only be granted where "payments of a particular character are made to or for any employees or benefits or facilities of a particular kind are provided for any employees" (Section 65(1) Income Tax (Earnings and Pensions Act) 2003). This means where expenses are paid or reimbursed by the employer or payer, or certain benefits are provided to employees by the employer.

Expenses that are not made to or provided for any employees by the employer cannot be included in, or afforded the protection of, a Dispensation. To give effect to tax relief in respect of expenses not afforded the protection of a Dispensation, an employee, or their authorised representative, needs to make a claim by letter, form P87, or their Self Assessment Tax Return. The fact that HMRC has granted a Dispensation to the employer does not negate the need for an employee or their authorised representative to make a claim where the employer has not made a payment of expenses.

Where an employer seeking a Dispensation clearly states in the original application, or in answer to a question from HMRC, that the employer will not pay or reimburse Travel & Subsistence expenses, HMRC will not grant a Dispensation that includes such Travel & Subsistence expenses.

Scale rate payments and the Advisory Benchmark Scale Rates can only be used for expenses made to or provided for any employees by the employer and where agreed as part of a Dispensation: they cannot be used by an employer to arrive at a sum on which tax and NICs "relief" is given each pay day where the expenses are incurred by the employee and not reimbursed by the employer.

HMRC may revoke a Dispensation where it believes that additional tax is payable in respect of payments or benefits. Alternatively HMRC could seek to take action to collect additional tax and NICs without disturbing the Dispensation because the administration of tax "relief" in this way is not sanctioned by the protection of the Dispensation and NICs "relief" is not available unless separate and distinct payments of expenses have been made.

For the avoidance of doubt, a Dispensation is granted based on information provided to HMRC by an employer and where HMRC is satisfied, based on that information, that no additional tax is payable in respect of payments or benefits. In agreeing a Dispensation, HMRC is not expressing any other view or agreement on anything other than the payments made or benefits provided that form the basis of the Dispensation.