Last reviewed 18 September 2018
Paul Tew, small business consultant and freelance advisor, looks at what expenses and benefits the exemption covers and what records employers need to keep.
Paid or reimbursed expenses, and benefits provided, for which tax relief is available in full are exempted from tax and National Insurance (NI), subject to certain conditions. The exemption applies to expenses paid or reimbursed at a scale rate, provided the employer either pays or reimburses at either the HM Revenue & Customs (HMRC) published benchmark scale rates or at a special bespoke rate agreed with HMRC in accordance with an approval notice.
The statutory expenses exemption is intended to cover most routine expenses and benefits incurred by employees. This includes business travel and subsistence, phone bills, business entertainment expenses, subscriptions to professional bodies and uniforms for work. The exemption cannot apply to company cars and vans, round sum allowances and mileage payments to employees who use their own vehicles for business travel.
However, employers can pay up to an “approved amount” tax-free to employees using their own vehicles for business travel. Furthermore, where HMRC agrees in advance that the round sum allowance is clearly intended to do no more than reimburse the employee for an expense actually incurred in doing the job, then the allowance can be paid gross without any deduction of tax and NI.
Expenses payments and benefits provided for which tax relief is not available on the full amount will need to be assessed for income tax and NI either through the payroll or on forms P11D/P11D(b). Likewise, the exemption will not apply to expenses paid or reimbursed under a relevant salary sacrifice arrangement. This means arrangements (whenever made) under which the employee gives up a right to receive an amount of income in return for the payment, or the amount of other earnings, depends on the amount of reimbursement. Expense payments made under a salary sacrifice arrangement will need to be paid after deduction of tax and NI.
Applying the HMRC scale rates
Employers do not need to apply for an exemption if paying HMRC’s benchmark rates for allowable expenses, although it will be necessary to have a robust checking system in place. However, if an employer wants to use a rate higher than the approved benchmark scale rate or where expenses are payable under different circumstances, then it will be necessary to apply for an exemption to pay a bespoke scale rate.
The benchmark scale rates are set as follows.
Minimum journey time
Maximum amount of meal allowance
15 hours (and ongoing at 8pm)
Where a scale rate of £5 or £10 is paid and the qualifying journey in respect of which it is paid lasts beyond 8pm, a supplementary rate of £10 can be paid to cover the additional expenses necessarily incurred because of working late. A meal is taken to mean a combination of food and drink. The 15 hours rate for subsistence will almost always apply where an employee is required to stay away overnight, provided the cost of any meals is not also included in an accommodation payment.
If a higher amount is paid without agreeing a bespoke scale rate with HMRC, the excess should be subject to PAYE tax and NI. An application to HMRC to use bespoke rates must set out the employees or groups of employees to be included in the approval notice, amounts of expenses that the employer wishes to pay, the occasions when these will be paid and confirm that the amounts are a reasonable estimate of the expenses actually being incurred by employees.
Using a robust checking system
Employers must also have a checking system in place for controlling and authorising payments and reimbursements. The checking system must be able to show that payments are only made on qualifying occasions where employees meet the relevant conditions for payment and that employees are in fact incurring and paying amounts in respect of the expense.
Employees are not allowed to check their own expenses, so someone else within the company needs to do this to make sure the expenses are legitimate. Checking systems will vary according to the size of the workforce and the proportion of that workforce who travel regularly for business. In smaller organisations, the directors may know all about the particular expenses incurred by employees, and there may be no need for checking at all.
An approval notice to pay bespoke rates will last for up to five years from date of issue, but employers must inform HMRC of any subsequent changes of circumstances made which mean the conditions under which the approval notice was issued are no longer applicable, eg the amounts paid are no longer representative of the amounts the employees are actually incurring or the checking system changes.
When a scale rate does not apply
There are three situations when the use of a scale rate is not appropriate.
Employees are already covered by a Working Rule Agreement, for which separate specific rates are in force for particular occupations.
Employees incur overnight accommodation costs. A benchmark scale rate has not been set for the reimbursement or payment of these costs. Employers wishing to agree a rate with HMRC for overnight accommodation will need to apply using the bespoke scale rate process.
Employees spend a night away from home while on business, and instead of staying in a hotel, the employee chooses to stay with a friend or relative living in or near the place where the business is being conducted. A scale rate has not been set for an employee staying with friends and family. If an employee incurs the cost of an evening meal, the employee is entitled to a deduction for a qualifying expense incurred while staying with family or friends.
The Government has legislated in Finance Bill 2018–19 that from 6 April 2019 employers will no longer be required to check receipts or other evidence when making payments to employees for subsistence using benchmark scale rates. This applies to standard meal allowances paid in respect of qualifying travel (performance of an employee’s duties or to a temporary place of work on a journey that is not substantially ordinary commuting). Employers will only be required to ensure that employees are undertaking qualifying travel. Abolition of receipt checking does not apply to amounts agreed with HMRC under bespoke scale rates or industry wide rates.
Three things to know when applying the exemption.
Almost all expenses or benefits that might previously have been covered by a dispensation notice (these notices ceased to be effective from 6 April 2016) are within the expenses exemption.
Benchmark scale rates are the maximum income tax and NI free amounts that can be paid by employers who choose to use the system. Employers can pay less than the published rates where it is policy to do so.
When applying to use a bespoke scale rate, HMRC will accept evidence in the form of a sampling exercise based on the expenses incurred. Employers should be prepared to provide evidence of the amount that their employees are actually spending.