UT/2023/000049 - [2024] UKUT 00233 (TCC)

In our view, s 65 ITEPA is essentially an administrative provision. Its purpose is to reduce work both for the employer and HMRC by removing the need for certain expense payments to be notified to HMRC. However, it serves an important function. Expenses can only be reimbursed tax free without notifying HMRC if the employer has applied for a dispensation. This allows HMRC to confirm that adequate procedures are in place on the part of the employer to ensure that the relevant employees have actually incurred expenses and that any other relevant conditions (such as the workplace not being a permanent workplace) are complied with.

However, attractively as Mr Firth made his submissions, we cannot accept that a deduction is automatically available in respect of expenses reimbursed by an employer where the employer has chosen to do so based on set rates rather than actual expenses incurred in circumstances where no dispensation has been obtained.

As Mr Firth accepts, Cheshire was decided in a very different context, being the question as to whether a genuine reimbursement of business expenses is earnings for NIC purposes. This is not a matter of statutory interpretation but is a matter which was decided based on the authorities. We have to interpret the relevant provisions of ITEPA. Looking at these provisions (and in particular ss 333, 334, 336 and 338 ITEPA) it is quite clear that a deduction is only available for expenses which have actually been incurred. There is no suggestion that an employer or an employee can claim a deduction for estimated expenses. The same principles do not therefore apply.

We accept that s 65 ITEPA only allows (and indeed requires) HMRC to grant a dispensation where it is satisfied that no tax liability arises. However, HMRC under its general care and management powers have a certain degree of latitude in applying the relevant tax provisions. They are no doubt entitled to take a pragmatic approach to the reimbursement of expenses if it were to be impractical or administratively burdensome to insist on proof of each individual item of expenditure.

However, this is a matter for HMRC and they are entitled to impose conditions in allowing the reimbursement of expenses on such a basis. One of the conditions of course is that they are satisfied that the benchmark scale rates are reasonable and that the employer has a proper system for monitoring whether all of the qualifying conditions for the deduction of the expenses which are being reimbursed have been met.

The discretion given to HMRC is apparent from the provisions of s 65 ITEPA which allow HMRC to revoke a dispensation if “in their opinion there is reason to do so”. A dispensation may be revoked with retrospective effect. If so, any liability to tax which would have arisen if the dispensation had never been given becomes payable (s 65(8) ITEPA). In these circumstances, both the employer and the employees are required to make all the returns which they would have had to make if the dispensation had never been given. In our view, this would include providing evidence (if requested) of the actual expenses which had been incurred. It is only these expenses which would then be deductible in accordance with the relevant provisions of s 338 ITEPA.

Our conclusion therefore is that there is no automatic entitlement to deduct the amounts reimbursed by Mainpay from the earnings of its employees in the absence of a dispensation. The only amounts which could be deducted were the actual amounts of the expenses actually incurred.