Employee expenses are an integral part of the tax system, as tax relief can be claimed on eligible expenses incurred whilst employees are doing their job. Broadly tax relief is available when expenses are incurred ‘wholly, exclusively and necessarily in the performances of the duties of the employment’. Expenses which put an employee in a position to do their job, e.g the cost of ordinary commuting, are not eligible for tax relief. There are also provisions for specific expenses, such as professional fees and subscriptions, and travel and subsistence.
When employers meet the cost of an allowable expense, either directly or by way of reimbursement, then the payment is not taxed. For example, if an employee pays for their own rail fare for a journey from their permanent workplace to another office for a business meeting, and their employer reimburses the cost, the reimbursement is not liable to income tax or NIC.
Sometimes employers may provide their employees with round sum cash allowances to cover potential expenses, e.g ‘travel allowance’, in case they need to travel for business trips. As such monies are given to employees regardless of whether they incur the expenses or not, then cash allowances are taxed in the same way as other employment income.
The administration of the tax relief for expenses paid for or reimbursed by the employer was simplified from April 2016 with the introduction of an exemption for paid or reimbursed expenses. Under this exemption, qualifying expenses can be paid by employers free of tax and without the need for an employer to apply to HMRC for a dispensation. Such expenses do not need to be returned to HMRC at the end of the tax year on form P11D, and employees do not need to make a claim to HMRC for a corresponding tax relief.
When employers do not reimburse expenses that employees have incurred, then the employee can make a claim for tax relief by submitting a claim to HMRC after the end of the tax year.
The rules apply to a range of expenses employees may incur such as:
• Mileage allowance up to HMRC’s approved rates, where an employee uses their own vehicle for business travel
• Business travel and associated expenses
• Professional fees and subscriptions to professional bodies
• Stationery for business use only
• Telephone charges for business calls
• Household expenses in the limited circumstances where an employee’s home is workplace
For some expenses which are not reimbursed, employees can claim a flat rate expenses allowance which HMRC have agreed across a wide range of industries and occupations. This removes the burden for employers and employees of calculating a large volume of small claims and retaining evidence for such.
When employers do not reimburse allowable expenses, some employees choose to claim the tax relief through an agent. Agents submit the claim to HMRC on the employee’s behalf and charge a fee for doing so. HMRC has evidence that the use of agents is increasing and want to understand why employees are choosing to use agents instead of claiming the relief directly from HMRC, especially when amounts up to £2,500 can easily be made online through an individual’s Personal Tax Account. Perhaps it is because individuals don’t trust HMRC to get it right?
At Autumn Statement 2016, the government announced that a call for evidence would be published to better understand the use of the income tax relief for employees’ business expenses, including those that are not reimbursed by their employer.
The cost of providing tax relief to employee expenses is significant and end of year claims made by employees has risen by 25% between 2009/10 – 2014/15. These claims cost the Exchequer £800 million per year. The government wants to understand more about why claims for non-reimbursed expenses have increased and also to ensure that the rules are effective.
Whilst the government has no plans to remove the relief on employee expenses, in an attempt to understand the use of the relief better, a call for evidence https://www.gov.uk/government/consultations/taxation-of-employee-expenses-call-for-evidence/taxation-of-employee-expenses-call-for-evidence has been launched with the main objectives being:
• If the current rules or their administration can be clearer and simpler.
• Whether the rules are fit for purpose in the modern economy. The main principles behind the current rules were introduced in the mid-nineteenth century and working practices have changed substantially since then.
• Why the cost to the Exchequer of the tax relief for non-reimbursed expenses has increased.
The call for evidence poses 17 questions found in three sections:
1. Current employer practices on employee expenses
2. Current tax rules on employee expenses
3. Future of employee expenses
Closing date for responses is 12th June 2017.