5. Exemptions and dispensations

You don’t have to report some routine employee expenses to HM Revenue and Customs (HMRC). This is called an ‘exemption’.

Exemptions have replaced dispensations. You can’t apply for a dispensation any more.

Expenses covered by an exemption

You don’t have to report certain business expenses and benefits like:

  • business travel
  • phone bills
  • business entertainment expenses
  • uniform and tools for work

To qualify for an exemption, you must be either be:

  • paying a flat rate to your employee as part of their earnings - this must be either a benchmark rate or a special (‘bespoke’) rate approved by HMRC
  • paying back the employee’s actual costs

You must deduct and pay tax and National Insurance on all other expenses and benefits you give to your employees, and report them to HMRC as normal.

Apply for an exemption

You don’t need to apply for an exemption if you’re paying HMRC’s benchmark rates for allowable expenses.

You only need to apply for an exemption if you want to pay bespoke rates to your employees.

You’ll have to give HMRC evidence that the rates you’re suggesting are based on your employees’ actual expenses.

If you had a dispensation from HMRC

Your dispensation won’t apply after 5 April 2016, but the expenses covered by it should also be covered by the exemption.

If you agreed bespoke rates with HMRC between 6 April 2011 and 5 April 2016 as part of your dispensation, you can apply to carry on using them.

You can only use the bespoke rates for up to 5 years from the date they were agreed.

Checking expenses

You must have a system in place to check payments you make at benchmark or bespoke rates.

Your employees aren’t allowed to check their own expenses, so someone else within your company needs to do this to make sure they’re legitimate.

Tell your employees to keep proof of their expenses, eg receipts or bills, in case you need to check them.