As confirmed in the Spring Budget 2017, HMRC have launched a consultation on the use of the income tax relief for employees’ business expenses, including those that are not reimbursed by their employer. The main objectives of the consultation, which will run until 12 June 2017, are to understand:
- if the current rules or their administration can be clearer and simpler;
- whether the tax rules for expenses are fit for purpose in the modern economy; and
- why the cost to the exchequer of the tax relief for expenses which are not reimbursed has increased.
Expenses form an integral part of the tax system as tax relief can be claimed on eligible expenses. However, the cost of providing this relief is significant – HMRC state that the tax relief on expenses which employers do not reimburse and employees then claim from HMRC costs the Exchequer £800m per year, and there has been a 25% increase in claims between 2009-10 and 2014-15.
The current rules
It is important that employees and employers are both clear on what tax reliefs employees are entitled to claim. Broadly, tax relief is available when expenses are incurred ‘wholly, exclusively and necessarily in the performance of the duties of the employment’. Expenses which put an employee in a position to do their job (such as the cost of ordinary commuting) are not eligible for tax relief. There are also provisions for relief for specific expenses, such as professional fees and subscriptions, and travel and subsistence.
When employers pay for or reimburse expenses that are eligible for tax relief, the payment is not taxed. For example, if an employee pays for a train ticket to travel from their permanent office to another office for a business meeting, and their employer reimburses the cost of the train ticket, the reimbursement is not liable to income tax or National Insurance contributions. However, if an employer pays a round sum cash allowance to cover potential expenses, such payments will be taxable in full.
The administration of the tax relief for expenses paid for or reimbursed by the employer was simplified from April 2016 with the introduction of an exemption for paid or reimbursed expenses. Under this exemption, qualifying expenses can be paid by employers free of tax without the need for an employer to apply to HMRC for a dispensation. These expenses do not need to be returned to HMRC at the end of the tax year on form P11D, and employees no longer need to make a claim to HMRC for a corresponding tax relief.
When employers do not reimburse expenses that employees have incurred, the employee can deduct them from his taxable income and subsequently claim tax relief at his marginal tax rate on costs incurred.
For some expenses which are not reimbursed, employees can claim a flat rate expense allowance. HMRC have agreed allowances based on the amount typically spent each year by employees in a wide range of industries and occupations to remove the burden for employers and employees of calculating a large number of small claims and retaining evidence for these. For example, employees who need to pay for the cost of repairing and maintaining tools and specialist clothing for work can apply for tax relief in this way.
Although the consultation document states that the government has no plans to remove the relief on employee expenses, changes to current procedures may be expected in the future.