Of course all businesses want to keep costs down and having a robust system in place for checking employee expense claims should be part of that regime. But what are the requirements to meet HMRC’s standards? Our Head of Payroll, Joanne Gibson advises.
Self-policing expenses policy
Generally, HMRC isn’t concerned about the amount that you pay your employees for job expenses. It realises that employers won’t pay more than they need to and so, to that extent, the level of expenses polices itself. Conversely, HMRC is very interested in checking that what employers pay in expenses either meets the conditions for tax and NI exemption or is put through the payroll and PAYE tax and NI accounted for.
Tax and NI exemption
Until April 2016 employee expense payments weren’t liable to PAYE tax or NI. Employers had to report all expenses payments to HMRC and employees had to declare them on their tax returns as either taxable or not. It was up to each employee to decide the tax treatment and HMRC to challenge if it didn’t agree.
However, the current system puts the onus on employers for checking if an expenses payment is exempt or taxable. If you can’t show that you’ve made a proper check and HMRC considers the expense payment to be taxable (and so also liable to NI) it can demand that you and not your employee pay the corresponding tax and NI bill. It may also ask you to pay a penalty.
If HMRC determines that an expense payment wasn’t exempt, but you can show that you made the proper checks and reasonably concluded that it was, it can’t demand the tax, NI or a penalty from you. Therefore, when you check if an expense meets the conditions for the exemption and decide that it does, keep a record of the checks you made, for example a copy of the HMRC guidance you followed.
HMRC can’t and does not dictate exactly how you run your employee expense checking system. Instead, it’s up to you to be aware of the rules for what is and isn’t an exempt payment.
HMRC’s guidance booklets 480 (general expenses and benefits) and 490 (travel-related expenses) should provide all the information you need for checking if a payment is exempt or liable to PAYE tax and NI.
In addition to guidance on general employee expenses, HMRC provides further information and model systems you can follow when checking subsistence payments to your employees. The rules for checking these changed in April 2019. While you don’t have to follow HMRC’s models, it’s sensible to at least incorporate their key elements in your own system. There are four models you can choose to use depending on whether your business is a one-person limited company (the rules don’t apply to sole traders and business partners) or a small, medium or large employer.
Your employees expenses system must include checks on whether payments qualify for the tax and NI exemption. If so, they can be paid tax and NI free; if not, they must be put through your payroll as taxable earnings. There is no specific system that you need to adopt but you must be able to show that payments you make tax and NI free, meet with HMRC’s conditions.