Handing out advance expenses to your employees can make their life easier. The trouble is that HMRC might take the view that the payments are taxable. When might it do this and what steps can you take to prevent it?
Tax and NI-free loans
With the cost of living still rising you’ve decided to offer interest-free loans to some of your employees. You’ve capped the amount they can borrow at £10,000, which is the maximum allowed by HMRC before the perk becomes taxable as a benefit in kind .
De minimis limit
The £10,000 is a de minimis limit. That is, if the amount that your employee borrows from you exceeds the limit, even by just £1 for one day in a tax year, the whole loan is a taxable one and not just the excess over the limit. As you were aware of this rule you placed a cap on the amount you’ll lend so there should be no question of a loan becoming a taxable perk.
Trap. All loans to the same employee must be aggregated for the purpose of checking whether the £10,000 limit is exceeded. You were also aware of this, but what you didn’t know was that advance expenses paid to an employee also count as a loan. This can tip the balance of a loan from being tax free to taxable.
Example. Acom Ltd has several employees who have borrowed from it, and some have borrowed close to the £10,000 taxable benefit limit. A few also travel extensively on business, working away from home for weeks at a time. Before such business trips Acom pays them an advance of expenses, e.g. Jack is paid £1,500 to cover motor, accommodation and subsistence costs and he has a loan balance from Acom of £9,100. The amount owed by Jack on the date of the advance is therefore £10,600 which exceeds the £10,000 tax-free limit and so is a taxable perk for the whole of the tax year, even for periods after Jack reduces the debt below £10,000.
Tip. In practice, HMRC allows employers to exclude advances of expenses where all the following conditions are met:
- the balance of expenses advanced at any time doesn’t exceed £1,000
- the advances are spent within six months; and
- the employee accounts to their employer, i.e. submits an expenses claim, at reasonable intervals.
Tip. HMRC’s internal guidance (Employment Income Manual EIM 26155) also says that if there’s is good reason for exceeding the £1,000 limit, for example, the advance is to cover a lengthy business trip, the advance can be ignored. It’s likely therefore that the advance of £1,500 made by Acom to Jack will not have to be treated as a loan, meaning that the £10,000 limit is not exceeded and the amount owed by Jack is not a taxable benefit in kind.
Record keeping
In such situations as we’ve described, to prevent trouble in the event of an HMRC inspection we recommend that your bookkeeper adds a note when they record advances of expenses to indicate, if appropriate, that an advance does not count as a loan because the conditions (as shown in HMRC’s guidance) are met.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.