Unpaid office holder expenses- exemption to replace ESC in April 2020

Wed 17 Jul 2019

The 2019-20 Finance Bill will turn the existing income tax Extra-Statutory Concession (ESC) for expense payments to voluntary office holders into a statutory exemption from 6 April 2020. A corresponding Class 1 National Insurance contributions disregard will apply from the same date. Please get in touch with a member of the Mazars employment tax team for a further discussion of this area.

What does this mean?

The legislation allows Employers to make payments / reimbursements of reasonable private expenses to voluntary office-holders tax and NIC free. We await HMRC guidance about the meaning of ‘reasonable private expenses’ including travel between home and the place the work is done.

Is this good news?

This is a welcome update for organisations in the not for profit sector (including charities, Community Amateur Sport Clubs, special constables, magistrates) as it provides greater clarity on the tax and NIC treatment of travel expenses incurred by voluntary office holders. In particular, this will be welcomed by those organisations with unpaid board members, who attend regular board meetings often held at the organisation’s head office. Previously, organisations had relied on the ESC and HMRC interpretation to determine the correct tax and NIC treatment for such expenses, but HMRC could still then challenge payments that had been made without tax/NIC being deducted.

Points of note

Care still needs to be taken, as the new legislation will not apply to office holders who receive remuneration for their duties, and such payments will follow the same rules as general employees. Therefore, employers will need to carefully consider the type of journeys undertaken by paid officeholders to determine the tax and NIC treatment, and have controls in place to identify what constitutes a “permanent” and “temporary” workplace. This can often be complex and taking appropriate advice is recommended. For example, where an organisation reimburses a paid office holder’s travel expenses from home to a board meeting held at a similar location each time, this will constitute a benefit in kind, and tax and NIC obligations will arise.

In such organisations, to help reduce the complexity, as well as remove the tax/NIC liability from the individual, it may be possible for an employer to agree to pay the tax and NIC on behalf of the paid office holders via a PAYE Settlement Agreement (PSA). Such an agreement needs to be in place before 6 July after the tax year, or earlier where a Class 1 NIC liability will arise. Whilst many Employers in the sector have a PSA in place for such payments, we have seen an increase in HMRC PSA reviews, and in recent cases HMRC has removed such expenses from being settled via a PSA. If any organisation has received contact from HMRC in this respect, we would be keen to discuss this further.