The importance of sound expenses procedures

Self-policing expenses policy

Generally, HMRC isn’t concerned about the amount paid to employees for job expenses. It realises that employers won’t pay more than they have to and so to that extent the level of expenses polices itself. Conversely, it’s very interested in checking that what employers pay in expenses either meets the conditions for tax and NI exemption or is put through the payroll and PAYE tax and NI accounted for.

Tax and NI exemption

Until April 2016 employee expense payments weren’t liable to PAYE tax or NI. Employers had to report all expenses payments to HMRC and employees had to declare them on their tax returns as either taxable or not. It was up to each employee to decide the tax treatment and HMRC to challenge if it didn’t agree.

The current system puts the onus on employers for checking if an expenses payment is exempt or taxable. If the employer can’t show that they have made a proper check and HMRC considers the expense payment to be taxable (and so also liable to NI) it can demand that the employer, not the employee, pays the corresponding tax and NI bill. It may also charge a penalty.

If HMRC determines that an expense payment wasn’t exempt, but the employer can show that they made the proper checks and reasonably came to the conclusion that it was, it can’t demand the tax, NI or a penalty. Therefore, it's a good idea to keep a record of the checks made, e.g. the link or copy of the HMRC guidance followed.

Checking procedures

HMRC can’t and doesn’t dictate exactly how employers run their expense checking system. Instead, it’s up to them to be aware of the rules for what is and isn’t an exempt payment. Half this battle is knowing where to find the relevant HMRC information and guidance.

HMRC’s guidance booklets 480 (general expenses and benefits) and 490 (travel-related expenses) should provide all the information needed  for checking if a payment is exempt or liable to PAYE tax and NI. If not, employers can contact HMRC. Details of how to do this are included in the booklets.

Subsistence payments

In addition to guidance on general employee expenses HMRC provides further information and model systems employers can follow when checking subsistence payments to  employees. The rules for checking these changed in April 2019. While employers don’t have to follow HMRC’s models, it’s sensible to at least incorporate their key elements in the system. There are four models to choose from depending on whether the business is a one-person limited company (the rules don’t apply to sole traders and business partners) or a small, medium or large employer