Employees often need to incur expenses when undertaking their jobs. The nature of the expense may vary depending on the job, but typical expenses include travel and subsistence expenses and fees and subscriptions.
It will often be the case that the employee initially incurs the expense and then reclaims the cost from their employer via an expenses claim. The employer may also choose to pay expenses by making scale rate payments.
As long as certain conditions are met, reimbursed expenses are tax neutral – the employer can ignore the payment to the employee – there is no need to tell HMRC about it or deduct tax or National Insurance. Likewise, the employee does not have to pay tax on the reimbursed amount or claim a tax deduction for the expense that they met initially.
The exemption applies if the employee would be entitled to a deduction if they incurred the expense personally. However, the exemption does not apply where the payment is made under a salary sacrifice arrangement.
An expense will be deductible if incurred by an employee if the employee incurs it wholly, necessarily and exclusively in the performance of the duties of the employment. A deduction may also be permitted under a specific legislative provision, such as that governing travel expenses or fees and subscriptions.
Angela is employed as a dentist. She is required to be a member of the British Dental Association by her employer. She pays her annual subscription, which she reclaims from her employer. The exemption applies and the reimbursement is ignored for tax purposes.
Scale rate payments
The exemption will also apply where scale rate payments are used to reimburse travel and subsistence expenses, as long as the amount has been calculated in an approved way and the employer is satisfied that the employee has undertaken the travel in respect of which the expense has been claimed. The employer can pay subsistence expenses using HMRC’s benchmark rates set out in regulations or agree bespoke rates with HMRC. The exemption does not apply if the payments are made under a salary sacrifice scheme.
Brian is required to visit a supplier as part of his job. He undertakes seven hours of qualifying travel and is entitled to claim a meal allowance. His employer pays the statutory amount of £5. The exemption applies and the meal allowance is ignored for tax purposes.
Employer meets the expense
The exemption also comes into play if the employer meets the cost of an expense which would be deductible if incurred by the employee personally, such as the cost of a train ticket for an employee to visit a customer for a meeting. The amount paid is simply ignored for tax purposes.
Catherine is required to attend a meeting with a supplier. Her employer purchases her train ticket. The exemption applies and Catherine’s employer does not need to tell HMRC about the expense or account for tax on it.
Partner note: ITEPA 2003, s. 289A; Income Tax (Approved Expenses) Regulations 2015 (SI 2015/1948).
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