An exemption regime now replaces the need to report these items on P11Ds as long as the necessary conditions are met.
To meet the conditions the business must satisfy itself that the employee would be entitled to full tax relief on expenses reimbursed to the employee.
Types of expenses
The main types of expenses to which the exemption applies are:
- travel and subsistence expenses
- fees and subscriptions
- business entertainment expenses.
All other non-allowable expenses are reportable on a P11D and/or subject to PAYE (and possibly NIC).
Employees are able to claim tax relief in respect of unreimbursed business expenses.
Conditions of the regime
In order for an employee reimbursed expense to be treated as an exempt payment, an employer needs to put himself in the position of the employee. The employer should ask the question - would that expense have qualified for full tax relief to the employee (were it not for the amount being exempt)?
There is no explicit requirement in law for a checking system but to answer the question an employer will, in practice, have to operate a checking system.
An employers should consider:
- setting out a corporate policy of which type of expenses are reimbursable and the need for those expenses to be reasonable
- requiring the completion of a standard expense claim form
- the need for any expense claim to be supported by a receipt
- making checks on expense claims
- requiring a senior person to authorise the claims
HMRC will be looking for evidence an expense has actually been incurred by the employee (hence the need for receipts).
The system allows for amounts based on scale rates to be paid or reimbursed, instead of the employee’s actual costs in certain circumstances.
Scale rates are generally for travel and subsistence expenses.
Benchmark rates are a set of maximum reimbursement rates for meals. These round sum amounts can be used by employers for payment or reimbursement of employees expenses where relevant qualifying conditions are met.
These rates apply only if the employee incurs expenditure in the course of ‘qualifying business travel’ as follows:
- one meal allowance per day paid in respect of one instance of qualifying travel, the amount of which does not exceed:
a) £5 where the duration of the qualifying travel in that day is 5 hours or more
b) £10 where the duration of the qualifying travel in that day is 10 hours
or more, or
c) £25 where the duration of the qualifying travel in that day is 15 hours
or more and is on-going at 8pm or
- an additional meal allowance not exceeding £10 per day paid where a meal allowance (a) or (b) is paid and the qualifying travel in respect of which that allowance is paid is on-going at 8pm.
Conditions for using approved rates
Employers must have a checking system in place if approved benchmark rates are used to ensure that the employee is incurring and paying amounts in respect of expenses of the same kind and that tax relief would be allowed.
Exemption is also conditional on neither the payer, nor anyone operating the checking system, suspecting or reasonably being expected to know or suspect that the employee had not incurred an amount in respect of the expense.
Business mileage rates
The main travel and subsistence expenses for many employees are their costs in using their own car or van for business travel.
Many employers and their employees use the statutory mileage allowances known as ‘authorised mileage allowance payments’ (AMAPs). These are scale amounts that employers can pay to employees using their own vehicle for business travel. For cars and vans, the scale rate is 45p per mile for up to 10,000 miles in the tax year and 25p per mile above this.
Qualifying travel expenses
Qualifying travel is a necessary condition for both travelling and subsistence expenses to be treated as an exempt expense (and also in the use of business mileage rates for cars and vans). A business journey is one which either involves travel:
- from one place of work to another or
- from home to a temporary workplace or vice versa.
Journeys between an employee’s home and a place of work which he or she regularly attends are not business journeys. These journeys are ‘ordinary commuting’ and the place of work is often referred to as a permanent workplace. This means that the travel costs for these journeys cannot be claimed as an expense.
The term ‘temporary workplace’ means that the employee attends the place for a limited duration or temporary purpose. However, some travel between a temporary workplace and home may not qualify for relief if the trip made is ‘substantially similar’ to the trip made to or from the permanent workplace. ‘Substantially similar’ is interpreted by HMRC as a trip using the same roads for most of the journey.
There are many types of journeys undertaken by employees so ensuring it is a business journey is vital especially as the term ‘travel expenses’ includes the actual costs of travel together with any subsistence expenditure and other associated costs of making the journey such as toll charges.
Pooled Cars and Vans
Some employers may have cars or vans that are readily available for business use by a number of employees.
These cars or vans, not allocated to any one employee and only available for genuine business use are known as pooled cars and vans.
No car or van benefit arises on a pooled car or van providing it satisfies all the following
It was made available to, and actually used by, more than one of those employees
It was made available, in the case of each of those employees, by reason of the employee's employment
It was not ordinarily used by one of those employees to the exclusion of the others
In the case of each of those employees, any private use of it made by the employee was merely incidental to the employee's other use of it in that year
It was not normally kept overnight on or near any residential premises where any of the employees lived, except while being kept overnight on premises occupied by the person making it available to them. HMRC will generally accept that a car is not normally kept overnight at employees' homes if the total number of nights on which it is taken home by employees, for whatever reason, is less than 60% of the total number of nights in the period under review.
All employers should have checking processes in place regardless of whether they use scale rates or specific reimbursement.
If there is a lack of evidence that amounts paid to employees represent business expenses, the business can be charged penalties for errors in completion of P11Ds.
In some cases if the expenses are non-business expenses the employer may also be responsible for PAYE and NIC underpayments.