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HMRC internal manual

Employment Income Manual

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HM Revenue & Customs
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Exemption for amounts which would otherwise be deductible: Bespoke agreements - Transitional arrangements

Where an employer has agreed a rate other than that set out in the Benchmark scale rate Regulations in respect of its employees within the 5 years preceding the introduction of the exemption on 6th April 2016, transitional arrangements are in place to allow the employer to continue to use that rate until the expiry of that 5 year period.

Agreement to allow an employer to continue to use their previously agreed rate will be subject to the employer making a simple application to HMRC. Employers will also need to show that they have a system in place for checking that employees are incurring and paying amounts in respect of expenses, and that a deduction would be allowed in respect of those expenses. 

An application to continue to use a previously agreed rate should be made in writing and will need to detail;

  • the rate agreed
  • the date of the previous agreement (not the date it applied from)
  • the conditions under which the employer makes any payments
  • the checking system that they have in place to ensure that payments are only made on occasions where employees are in fact incurring and paying expenses of the kind reimbursed
  • that a deduction would (ignoring the exemption) be allowed under Chapter 2 or 5 of Part 5 ITEPA 2003 in respect of those amounts. See EIM30270.

Applications to continue to use a previously agreed rate will need to be made in sufficient time to allow an approval notice to be issued prior to 6 April 2016.

If an employer fails to reach agreement with HMRC for the continuing use of a bespoke rate prior to 6 April 2016, and continues to pay that rate, any amount in excess of the benchmark scale rates will be treated as a round sum allowance and chargeable to tax and NICs as earnings from the employment.

Example

An employer agreed a bespoke scale rate with HMRC of £6.20 per qualifying day for employees travelling in the performance of their duties.  Their agreement is dated 25 September 2014. In setting this rate the employer undertook a series of sample checks over sufficient period to satisfy HMRC that the agreed amount was broadly representative of the amount that employees are actually spending on allowable subsistence expenses.

In an application in January 2016, the employer requested that they be able to continue to use their agreed rate until 24 September 2019.  The employer confirmed that they had appropriate checking systems in place, and that expenses were not reimbursed through a relevant salary sacrifice arrangement. Prior to 6 April 2016, HMRC issued an approval notice confirming their agreement that the employer could continue to use their agreed rate until 24 September 2019, and that all payments made to employees that meet the qualifying conditions will be exempt from tax until then.

The employer will need to apply for a new rate to apply from 25 September 2019 supplying appropriate evidence of the sampling exercises they have undertaken and detailing the checking process they have in place. The employer could use the benchmark scale rates from that date if they choose to.