In most cases, expenses an employee incurs at work are paid for by their employer, but some, like travel and accommodation expenses, are reimbursed later by the employer.
Since 2016, the system for reimbursed expenses has been simplified, which means that HM Revenue & Customs (HMRC) will usually accept that business expenses that are reimbursed by an employer are not taxable benefits for the employee and do not need to be shown on a P11D, provided it is not made as part of a salary sacrifice scheme.
However, HMRC has to be satisfied that the expense is allowable for tax purposes, otherwise, the reimbursement from an employer is treated as additional taxable income. To be allowable the expense has to be either:
- An amount at least equal to the payment that could be claimed as a deduction; or
- The expense is an approved flat rate payment.
To claim a deduction an employer must:
- Always retain evidence that an expense payment is covered by an equivalent deduction in case of future HMRC enquiries; and
- Be able to prove that the payment is not part of an arrangement to avoid tax, or else the exemption does not apply.
An exempt flat rate payment must be calculated in a manner approved by HMRC. This approval can be achieved by using benchmark rates.
Under changes to the rules, employers are no longer required to check receipts when making benchmark subsistence payments where an employee is making qualifying travel.
If this is not the case, then an employer must seek HMRC approval for the deduction, which can be granted for five years.
However, the following conditions must be met:
- The employer must have a system in place to check that the employee is, in fact, incurring the stated expense and that a deduction would be available for it; and
- Neither the employer nor the individual operating this system knows, or has reason to suspect, that the employee has not incurred the expense or that a deduction should not be claimed.
Employers need to be aware that approval can be revoked at any time by HMRC if it believes there is cause to do so. There is no appeal process for this and revocation can be backdated.
The rules around expenses are often complex, which is why businesses are encouraged to seek advice to make sure they make accurate claims and payments.
