Treatment of non-deductible and non-exempt expenses 2016/2017

HMRC has provided further guidance on the treatment of non-deductible and non-exempt expenses in the October 2016 release of it’s Employer Bulletin.

It states that from 6 April 2016 any expenses you reimburse to your employees that are fully
deductible from their earnings are no longer subject to tax and National Insurance
contributions (NICs), provided they are not part of a relevant salary sacrifice
arrangement. There is no need for employers to include them on P11D and for the
employees to submit deduction claims to HMRC. Dispensations no longer apply.
Employers who wish to pay the tax and NICs on non-deductible expenses can still
agree PAYE Settlement Agreements with HMRC.

For the tax year ending 5 April 2017 expenses payments that are not fully deductible
should not be reported on form P11D, but instead should be treated as earnings and
the full amount should be subject to tax and Class 1 NICs.

For mixed expense payments (for example, home telephone rental) if you can clearly
identify the allowable expense amount at the time of payment, only the non-exempt
amount will need to be treated as earnings and subject to tax and Class 1 NICs
through the payroll.

If the non-exempt amount is not clearly identifiable at the time of payment you should
treat the full amount as earnings and deduct tax and Class 1 NICs accordingly. Your
employees can then claim tax relief for the exempt amount related to business use in
the normal manner.

Where a benefit is provided that would have previously been included in a dispensation
because a fully matching deduction is available, and it is not provided under a relevant
salary sacrifice arrangement, the exemption applies in the same way as to paid or
reimbursed expenses. If the benefit is not fully matched by a deduction, the full value
of the benefit should be reported in the normal way.

Further information relating to the end of year reporting of expenses and benefits,
including how to deal with items that have not been reported via payroll during the
year, will be published in the February 2017 edition of HMRC’s Employer Bulletin.

The full Employer Bulletin can be read here