It is all change on the tax front at present. If you are an employer and reimburse your employee for expenses incurred then the rules regarding the what needs to reported to HMRC on Form P11D changed on 6th April 2016 . It is now no longer to report expenses if, had the employee borne the cost personally, they would be entitled to claim a tax deduction for it.
The cynics amongst us see an unpublished reason for this change. Under the old rules once an employer had reported the expense to HMRC on Form P11D then his job was done and it was up to the employee to consider whether the expense qualified for a tax deduction and to make a claim. However, since 6 April that responsibility has shifted to the employer. If an employer believes that an expense would be tax deductible then he can reimburse the employee, record the payment and forget it. However, if it is not a qualifying expense then he must treat it as earnings and deduct PAYE and NI before making the payment and report it under the RTI regulations and failure to do so could lead to substantial penalties.
So, how do you decide which expenses qualify. Some types of expense aren’t a problem – it’s easy to decide if they are tax deductible. For example, where an employee works from home and buys the stationery they need to do their job, you can reimburse them tax and NI free without a worry. However, other expenses are less clear cut.
Generally, an expense is tax deductible, and therefore can be reimbursed or paid for without applying PAYE tax or NI, if it’s incurred “wholly, exclusively and necessarily in the performance of the duties” of the employee’s job. Direct job expenses, such as stationery, etc purchased, will clearly meet these conditions. However, deciding whether business travel and related expenses such as subsistence and accommodation are deductible can be more difficult. HMRC has recently updated its guide to employee travel expenses, Booklet 490, to cover the new rules. This booklet is 75 pages long and therefore cannot be reproduced here. However, it can be download from:
https://www.gov.uk/government/publications/490-employee-travel-a-tax-and-nics-guide
It includes many examples which will help you decide if an expense is exempt. Our advice is to get a copy of this booklet if you have any employees, and this includes the one director/shareholder company. if an employer gets it wrong then HMRC will demand the tax and NI, plus possibly penalties, from them. Whilst HMRC say that if an employer couldn’t reasonably have known an expense didn’t qualify then he won’t be liable for the consequences of getting it wrong we feel that this reassurance is as valuable as a snowball in a desert. The test generally adopted by HMRC in deciding whether a trader has acted reasonably is whether a post-graduate student in UK taxation would know that the decision on whether the expense was deductible was incorrect!
We are happy to help clients in this as in other matters. However, also be aware of the protection offered by our fee protection policy in ensuring that we can fight on your behalf any unreasonable demands made by HMRC on you and your business.