HMRC loss at Tax Tribunal over P11D dispensation row
By Justine Riccomini, Head of Tax (Employment and Devolved Taxes)
18 May 2023
Justine Riccomini explains how NMW Solutions Ltd won its case at the First Tier Tribunal.
Who would have thought that something as ostensibly simple as a P11D dispensation would be the subject of a tax tribunal case?
In the NWM Solutions Ltd v HMRC [2023] UKFTT 364 (TC) case which was decided in April 2023, the P11D dispensation took centre stage, which serves to remind us that any aspect of taxation can potentially come back to bite us. However – in this case, it wasn’t the employer (an umbrella company) who received the bite – it was HMRC.
Obsolete legislation
There is no longer a requirement for an employer to obtain written permission to exclude certain benefits in kind from a P11D (a P11D dispensation), due to the introduction of so-called “benchmark rates” for travel and subsistence payments, which for the 2015-16 tax year are set out at EIM05231.
The rules contained within s.65 ITEPA 2003 and s.70 (2)(c) ITEPA 2003 which were removed from the statute books on 23 March 2015 under FA2015, required the employee or director to have “paid away” the expenses. In other words, they had to have incurred an expense for it to have been reimbursed to them free of income tax and NICs under the terms of the P11D dispensation. The employer was supposed to check that the expenses had in fact been incurred. The requirement to actually incur additional expense (as opposed to taking a home-made packed lunch) was also contained in EIM05231 for the 2015-16 to 2018-19 years; but from 6 April 2019, the legislation at s. 289 ITEPA was amended by virtue of s.289A(4A) ITEPA 2003 in FA 2019 to lower the checking requirement to that of ensuring that qualifying travel had been undertaken. This new guidance is set out at EIM30225.
In this case, the employer was paying scale rate expenses for subsistence. When HMRC demanded to see receipts for all the meal allowances that had been paid, the employer found they could not provide them in many cases. HMRC did not revoke the dispensation as they would have been entitled to do under s. 65(6) ITEPA 2003. Nevertheless, they argued that NWM owed almost £2m in Income tax and NICs.
Cases considered
The following cases were referred to by the judiciary in helping them reach their decision:
- Pook (Inspector of Taxes) v Owen (1969) 45 TC 571 (HL);
- Donnelly (Inspector of Taxes) v Williamson [1982] STC 88 (HC) (Williamson);
- Cheshire Employer and Skills Development Ltd v RCC [2012] EWCA Civ 1429 (CA) (Cheshire); and
- Reed Employment plc v RCC [2014] UKUT 160 (TC) (UT) (Reed).
Turning point
At Paragraphs 66-68 of the judgement, Judge Austen states:
“The parties are in agreement that the Dispensation in this case was in force at all material times. As a result, we consider that the only factual question which arises for determination at this point is whether NWMSL had an obligation to account for tax for reasons unrelated to s.65, per Reed FTT at [292]. If the answer to that is “yes”, then then NWMSL would have to account for that tax (because s.65 and the Dispensation would be irrelevant, whether or not in force). But if not, then Reed at [334]-[337] is clear in our view that the Dispensation was “fully effective…unless and until revoked”. Most importantly, our own construction of s.65 leads us to the same conclusion.
67. We have concluded that the “listed provisions” in s.65(1) did apply to the payments subject to this appeal because (unlike those in Reed), we found above that, being the reimbursement of expenses incurred by employees, the payments were within the scope of Chapter 3, which is one of the “listed provisions” in s.65(1).
68. As a result, we have decided that the reasoning in Reed at [334]-[337] applies, as contended by Mr Ewart. The effect of the Dispensation is therefore that…all the payments subject to this appeal were automatically removed from any liability to tax.”
This was a turning point for NWM because the FTT considered that as HMRC had not revoked the dispensation, the tax and NICS were not payable as the spirit of the dispensation was to provide an administrative easement.
Conclusion
In allowing the appeal in full and setting the HMRC determinations aside, the FTT concluded:
“… the effect of a dispensation is to remove relevant payments entirely from the scope of taxation. We therefore conclude that unless and until a dispensation is revoked, it is not open to HMRC to assess to tax any payment purportedly made under it. In this case, the parties were agreed that the Dispensation was never revoked by HMRC. Accordingly, even if HMRC were right to say that NWM was in material breach of the conditions in the Dispensation, they could not issue the Determinations and Decisions, and it would have been irrelevant even if NWMSL was found to be in material breach of the conditions purportedly contained in the Dispensation.”
It is worth reviewing cases such as this when the taxman comes to call. In this case, the employer saved the best part of £2m.
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