Back in March, the government published a call for evidence to understand more about the rules and administration of the taxation of employee expenses. This was motivated by the growing trend in the number of employees making claims for tax relief for expenses, directly with HMRC.
The call for evidence ran until July and its aim was threefold:
The responses to the document have recently been published, Taxation of employee expenses: response to the call for evidence (PDF) and reveal, somewhat surprisingly, that there is little appetite for change to the current system. Many respondents did, however, flag up the complexity of the travel and subsistence rules.
Employers’ expense policies try to strike a balance between twin objectives. Businesses want to reimburse legitimate business expenses whilst, at the same time, controlling the cost of such. To achieve the latter, many businesses don’t reimburse expenses that do not attract tax relief, whilst others choose not to reimburse all or part of tax-deductible expenses, leaving their employee to submit a claim to HMRC for relief.
Most employers don’t tell their employees how to go about claiming tax relief from HMRC for two reasons. Firstly, employers may not wish to draw attention to the fact that they may appear miserly and, secondly, they think that there could be a legal or compliance risk should they give their employees incorrect tax advice.
No prizes for guessing that the main type of expenses incurred by employees relate to travel and subsistence. However, other frequently-incurred expenses include professional subscriptions and fees (including professional indemnity costs), cleaning of uniforms and safety wear, mobile phone usage, and course fees for continuing professional development.
Almost all respondents said that employees expect to be reimbursed by their employer for the legitimate expenses they meet themselves. There were however particular types of expenses where employees generally do not expect to be reimbursed, those being:
All the respondents required receipts as evidence of expenses incurred partly for business administration but also to fulfil their tax compliance obligations. This was however considered to be onerous and disproportionate for smaller expense claims.
New technology is also changing the way that employees provide evidence of the expenses they incur. It can therefore be increasingly rare to be given a receipt when using a contactless card for a single journey on public transport. Also, the increasing use of smartphones can eliminate the need for paper receipts as employees can more easily take photos of receipts, send proof from online banking apps, and provide automatically generated itineraries in lieu of travel receipts.
In order to reduce the administrative burden on business and employees, the requirement for employers to check receipts when making payments to employees for subsistence using benchmark scale rates will be removed from April 2019.
Over the last 5 – 10 years, there has been little significant change in either the expenses employees incur or the expenses reimbursed by employers.
A minority of respondents, who believed that practices have changed, said that the amount of expenses incurred has increased but employer reimbursement has decreased, which would help explain the rise in the number of claims HMRC have noticed.
Where increase in expenditure has been reported, this is mostly due to employees working between several offices or bases and incurring additional costs in travelling between them.
Those who reported a decrease in expenses reimbursed said that this was due to increased cost pressure on businesses and general ‘tightening of belts’.
Most respondents agreed that the scope of expenses eligible for tax relief reflects the type of expenses that employees incur today.
Where there was an increase in the number of employees working between several bases, then it was considered by some respondents that the tax rules should be more generous to keep up with this practice.
Training costs were mentioned with some saying it was unfair that tax relief applies if an employer pays for a training course but not if the employee funds the same course and it is not reimbursed. In response, it was announced in the Autumn Budget that there will be a consultation in 2018 on extending the scope of tax relief currently available to employees (and the self-employed) for work-related training costs, to support lifelong learning and retraining.
The general consensus was that the system for claiming tax relief on non-reimbursed expenses was complex and difficult for employees and suggested that awareness could be improved via the GOV.UK website, messaging on the Personal Tax Account, and social media.
Some suggested that the most important message for HMRC to highlight is that claiming for tax relief can be done directly and does not incur a cost. Well they would wouldn’t they but they also neglect to point out that the employee is only being repaid a fraction of the expense in comparison to full reimbursement by the employer.
It was felt that the introduction of the Personal Tax Account is a good opportunity for more employees to claim tax relief on non-reimbursed expenses directly and that the form could be pre-populated with known information about the taxpayer to save time.
Many agreed that flat rate expenses ease the administrative burden but the rates could be more generous. Having flat rates for expenses makes it easier for employees to understand the levels at which they can spend and claim.
HMRC will work with third parties to explore possible improvements to the guidance on employee expenses, particularly on travel and subsistence, and the process for claiming tax relief on non-reimbursed expenses.
Most respondents did not think that the type and amount of expenses incurred or reimbursed will change substantially in the next 5 – 10 years. However, there were those who anticipated an increase in international travel and believed that accommodation and subsistence overseas scale rates are a useful and simple way for employers to reimburse employees for the costs that they incur, especially as reimbursing expenses on an actuals basis can be challenging in foreign countries.
As from April 2019, the existing concessionary accommodation and subsistence overseas scale rates will be put on a statutory basis.