In the vast majority of businesses, employees will incur business costs themselves that they go on to claim back from their employer via an expense claim process. Whether the reimbursement is liable for income tax and National Insurance (NIC) should be considered prior to paying the sum to the individual to ensure the correct treatment is applied and that the business does not suffer penalties or HMRC review as a result of the incorrect treatment being used.
With the abolition of dispensations back in 2016, guidance businesses supply to their employees around expense claims has become even more important to ensure HMRC agree with the treatment applied, especially where amounts are being paid without charge to tax and NIC.
From our recent experience, it also appears that HMRC have now become far stricter when it comes to reviewing that expenses have been treated correctly, and as an absolute minimum we would advise employers to ensure that the following documentation is requested from employees for each expense claim submitted;
- Description of why the expense was incurred
- The date on which the expense was incurred
- A copy of the receipt showing the goods/services purchased and the price, as well as VAT details if appropriate
Generally, where employers are still operating a manual expense process and do not have an online system for submitting claims, we would suggest that a template claim form is issued to employees detailing the information required to help ensure the business remains compliant. We would also advise that expenses should not be paid without deduction of tax and NIC where full details of the reason for incurring the expense and receipted back-up cannot be provided.
To support the above and to ensure that all employees are treated equally, ultimately making life easier for the business, we would urge employers to take the time to implement a full expense policy containing provisions for all possible expenses, taking into account HMRC’s guidelines. Rules surrounding timescales for submitting claims and upper limits in line with the business’ objectives can also be included in a policy meaning the Company won’t be faced with employees submitting a huge backlog of historical expenses or excessive amounts, posing an impact on cash flow.
It is also useful to have employees sign a declaration at the outset of their employment confirming that they have read and understood the policy leaving the Company formal documentation to fall back on in the case of any dispute with employees or future challenge from HMRC
If you would like any assistance with determining the treatment of employee expenses or with implementing an expense policy/template claim form, please do not hesitate to contact Megan McDonald (email@example.com) or your usual AAB contact for more information.
To find out more about Megan and the Payroll and Employment Taxes team, click here.