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PAYING EXPENSES TO EMPLOYEES – What to report?

 

PAYING EXPENSES TO EMPLOYEES – What to report?

As an Employer, what do I have to report to HM Revenue & Customs, when paying expenses to employees, or reimbursing them for costs incurred on behalf of the business?   And do I have to deduct tax and National Insurance?

The rules in this respect changed on 6 April 2016.   Many employers will not have considered the new rules, although HM Revenue & Customs (HMRC) have provided additional guidance in their Employer Bulletins issued in October 2016 and February 2017.

 

Expenses payments paid to company directors come under these rules in addition to payments made to employees.

1) Expenses paid/reimbursed to employees –  Fully  taxable

The rules  now applying from 6 April 2016 are that expenses payments and reimbursements that are fully taxable should be entered on to the payroll as earnings when paid, with Income tax deducted and Class 1 National Insurance Contributions (NIC’s) accounted for.

This is a requirement that did not exist in the past, and employers will have to be careful that they do not incur liabilities to Tax, National Insurance and penalties by not applying these rules.

3) Expenses paid/reimbursed to employees – Partly taxable

The treatment for reporting purposes here depends on whether the employer can identify the taxable and non-taxable elements, at the time the payment is made.

(a)  If the business-related amount is clearly identifiable, the private use part (ie the taxable part) is to be treated in the payroll as earnings through payroll, again with any appropriate tax and class 1 NIC’s accounted for.

(b)  If the business-related amount is not clearly identifiable, the rules require employers to treat the whole amount to be treated as earnings and put through the payroll.

In respect of (b) above, the employee will be able to make a claim for Income tax relief, on any expenses that have been put through the payroll and therefore taxed, but which are in fact exempt.  This can be done either through a stand-alone claim or through a self-assessment tax return.

However, it does seem unfair that there appears to be no mechanism for the employee or indeed the employer to recover any overpaid National Insurance on the business element of such payments – therefore it would be better for the situation in paragraph (b) to be avoided if possible.

Subsistence Allowances for employees

There are special rules in place for to determine how much if any of this type of payment is taxable.  The rules include Benchmark rates set by HMRC that must not be exceeded if the payment is to be free of tax and NIC’s (EIM 30240).

However, payments in excess of these rates may still be non-taxable provided that HMRC have agreed and have either

issued a formal “Approval Notice”;  or

the rate has been included in a dispensation granted by HMRC within the last five years.

 

3) Expenses paid/reimbursed to employees – Non-taxable items

From the tax year 2016/17 onwards, where expenses payments are non-taxable, the principle is that they are no longer reportable to HMRC.  This however is subject to certain conditions.

The conditions are that:

Employers are checking that employees are incurring and paying expenses of the same amount they claim; and

At the point of reimbursement, employers should satisfy themselves that the expenses are not taxable payments.

Prior to 6 April 2016, these expenses were reportable to HMRC by employers on an annual form P11D unless a dispensation had been granted to remove the need for such reporting.

The above exemptions from reporting do not apply to expenses paid as part of a salary sacrifice arrangement, and these must be subjected to Income Tax and National Insurance.

 

 

Steve Cordes

Written by Steve Cordes – FCCA TEP of Spurling Cannon

If you would like to contact Steve about this blog post or any other accounts related matter, please e-mail him on steve.cordes@spurlingcannon.co.uk or phone the office on 01843 848383

Spurling Cannon Limited have made every effort to ensure accuracy at the time of publication. Information may be subject to legislative changes. Recipients should note that information may not reflect individual circumstances and should, therefore, not act on any information without seeking professional advice. We cannot accept any liability for actions taken or not taken as a result of the information given in this publication.

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