Tribunal confirms taxpayer can benefit from HMRC dispensation for employee expenses

In NWM Solutions Ltd v HMRC [2023] UKFTT 364 (TC), the First-tier Tribunal (FTT) held that the taxpayer was able to benefit from a dispensation issued by HMRC in relation to the reimbursement of certain employee expenses.

Background

NWM Solutions Ltd (NWM) allowed its employees to expense costs incurred on food and drink when working past 8pm or while "travelling in the performance of duties of the employment". Employees recovered these costs by submitting a claim form which specified that employees did not need to submit receipts to support the claim but provided the following "by making a subsistence claim, you confirm that you have incurred a cost on a meal". 

NWM obtained a dispensation from HMRC in relation to these expenses. A dispensation is a notice from HMRC (issued under section 65, Income Tax (Earnings and Pensions) Act 2003) which provides that certain expenses paid or reimbursed by employers are not subject to income tax or National Insurance Contributions (NICs) and do not have to be reported to HMRC.

On 1 November 2017, HMRC issued three determinations relating to underpayment of PAYE for the period 2013-2016 and six decisions relating to NICs for the period 2014-2015 (the Decisions). HMRC argued that the payments subject to the Decisions were not the reimbursement of expenses incurred because there was no evidence that the employees actually incurred the expenses. It followed that the payments were in fact 'round sum allowances' and were subject to income tax and NICs. 

HMRC further argued, in the alternative, that the dispensation contained conditions which were not met by NWM and therefore the payments fell outside of its scope. In particular, the dispensation provided that the "employer will need to keep sufficient records to be able to demonstrate that the employee was entitled to the payment" and carry out routine checks to ensure the rules are followed. HMRC argued that for NWM to have complied with these conditions, they must have obtained receipts for the expenditures and checked 10% of subsistence claims every month. 

NWM appealed against the Decisions on the basis that the dispensation was in force throughout the period and covered all the relevant payments.

FTT decision

The appeal was allowed.

The FTT concluded, on the evidence before it, that the employees had incurred the relevant expenses and NWM had constructed a genuine expense scheme to attempt to balance cost and repayment. On that basis, the amounts subject to the Decisions were not 'round sum allowances' and fell within the scope of the dispensation.

Considering the conditions in the dispensation itself, the FTT was of the view that HMRC's proposition that "sufficient records" meant receipts of the expenditure and "routine checks" meant checking 10% of subsistence claims every month, was unfounded and, in any event, was not specified in the dispensation itself. On balance, the FTT found that NWM's broad-brush approach of including the wording it had in the claim form was sufficient. Oral evidence was given regarding the checks undertaken by NWM and the FTT was satisfied that those checks were sufficient. 

The FTT was also of the view that, even if NWM had breached the conditions of the dispensation, HMRC would not have been able to issue the Decisions, as its only remedy would have been to revoke the dispensation.

Comment

This decision examines dispensations and will be relevant for similar cases which are still under review by HMRC. Although employers will no doubt welcome the FTT's decision regarding 'round sum allowances', it is of limited general application as dispensations were abolished from 5 April 2016, in favour of a tax exemption for qualifying expenses paid or reimbursed by employers.

The decision also highlights the importance of businesses having in place systems which adequately evidence compliance.

The decision can be viewed here.