As an employer it’s up to you to decide if expenses you pay or reimburse your employees are taxable and apply PAYE tax and NI if they are. Getting it wrong could land you in hot water with HMRC. How can you make sure this doesn’t happen?
Taxable
Job-related expenses paid by or reimbursed by employers to employees were treated as taxable income until 6 April 2016. As an employer you were required to report the expenses on Form P11D. It was up to your employees to submit a claim for tax relief to HMRC for the expenses that met conditions for not being taxable. Since April 2016 employers must decide if expenses are taxable or exempt. If they’re exempt you can simply pay them to the employee, otherwise they count as pay for PAYE tax and NI purposes.
Trap. HMRC says it will collect the tax and NI from you if it decides you’ve made the wrong decision.
Conditions for exemption
Expenses payments are exempt where two conditions are met:
Condition A is that you have a system for checking that:
- employees have actually incurred the expense you’re paying or reimbursing; and
- it is a genuine business expense incurred “wholly, exclusively and necessarily” in the course of carrying out the duties of the employee’s job.
Condition B is that you do not know or suspect, or could reasonably be expected to know or suspect, that:
- the employee did not incur the expense; or
- that a deduction from the employee’s earnings would not be due because the “wholly and exclusively” etc. condition isn’t met.
Mixed expenses – avoiding risk
You should treat an expense which to any degree is not incurred wholly and exclusively for business as entirely taxable, e.g. a business journey which includes home-to-work travel. No apportionment is required. If the employee disagrees, they can claim a tax deduction for it and argue their case directly with HMRC.
Mixed but separate
While an expense which has exempt and taxable aspects must be treated as wholly taxable, this isn’t the position where there are distinct elements each of which can be identified as wholly exempt or wholly taxable. For example, you pay the travel and accommodation costs of an employee for a three-night business trip. As a goodwill gesture you pay for a double room so that the employee’s spouse can join them on the final night. You should apportion the hotel bill as two-thirds exempt and one-third taxable.
The importance of condition B
Despite HMRC’s threat to make employers who wrongly categorise taxable expenses as exempt liable for the tax and NI, condition B provides protection.
Tip. Check HMRC’s guidance (and keep a copy) for expenses you’re unsure about. If you’re happy they are exempt, condition B protects you from HMRC landing you with the bill even if you got it wrong.
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.