The recording, authorisation and payment of 'employee expenses' is something HM Revenue and Customs (HMRC) will look at in detail, particularly if it is found to be out of line with the business expenses policy or dispensation. Taxable errors on expenses when multiplied by a number of employees and over several years can add up to a large sum that a business may owe the ‘taxman’. Poor expenses policy recording and authorising systems provide HMRC with an indication of how the business deals with all its tax affairs, which can lead to HMRC investigations across all taxes. A detailed and regulated expense policy with a strict auditing procedure will ultimately save the business money.
Understanding the tax position
Most businesses do not realise that, strictly, the payment of all expenses or reimbursement of expenses is a taxable benefit that should be reported on each employee's annual return of benefits in kind (Form P11D). It is then up to the employee to make a claim for relief from tax on the basis that the expenditure was incurred wholly, exclusively and necessarily for business purposes. Agreeing a dispensation with HMRC, however, allows the employer to depart from the above strict legal position with official approval. Employers otherwise can be fined up to £3,000 for each incorrect P11D submitted to HMRC and the copy given to the employee. In addition, they will be asked to pay for arrears of tax and NICs arising from the error. Incorrect P11Ds also run the risk for the employees of filing incorrect self-assessment income tax returns.
Were a business meets or reimburses any employees' expenses it should have in place a comprehensive dispensation (also known as a ‘P11D Dispensation’). In essence, the dispensation spells out those items that an employer need not include on a P11D (other than normal statutory allowances where there is no need to report the payments). Those items are generally ones where HMRC is satisfied that the employee could make an equal and opposite claim for a tax deduction under self-assessment. This clearly has advantages in saving time preparing the P11D’s, also for employees by not having to make a claim for business expenses incurred, and reduces the risk of reporting errors. The dispensation should reflect the current policies and procedures in place in your business. Travel, subsistence and entertaining are key areas. A dispensation can also be an opportunity to negotiate with HMRC certain ‘round sum allowances’ which may substantially ease the administration burden for the business.
The expenses policy
A dispensation is only effective where it covers the actual practice and scope of expenses being paid. To do this a vital starting point is to have a clear expenses policy. This will give detailed guidance on the expenses process, specifically:
- clear and explicit guidance to employees as to the type and amounts of expenses they can incur;
- the evidence required to support the claim; and,
- the process for claiming, reviewing and authorising expenses.
PAYE Settlement Agreements
Alongside the company expenses policy and tax reporting dispensation, it will normally be appropriate also to agree an annual PAYE Settlement Agreement (PSA) with HMRC. It will be unusual in most businesses to expect employees to pay any tax arising on items such as, for example, staff entertaining, staff incentives and staff awards. HMRC will therefore expect most employers to have a PSA to account for the tax and national insurance. A PSA is the process that enables the employer (rather than the employee) to pay the tax and national insurance on certain ad-hoc taxable benefits.
What should you do?
In order to minimise the risk of exposure to additional tax, national insurance, interest and penalties, you should be reviewing the following key issues:
- The quality of the expenses guide for employees.
- The robustness of the processes for controlling the tax issues arising from expenses claims.
- The coverage of the dispensation.
- The scope of any PSA.
The above process then needs to be regularly reviewed for updates to taxation, reporting and also the working patterns of your employees (particularly in the context of travel and expenses).
Our company has tax specialists who help our clients design, implement and administer employment tax policies for businesses.
Always take professional advice when deciding your tax planning or investment strategy. The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. April 2014 Harbour Key Limited © All rights reserved