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Encouraging employers to pay up – employee expenses

Non-reimbursed employee expenses costing the Exchequer

Many employees will incur expenses during the course of the performance of their job, in particular business travel. If their employer does not pay for an expense directly or reimburse it, then it is left to the employee to claim tax relief on the cost of the expense directly from HMRC, provided the expense is incurred ‘wholly, exclusively and necessarily in the performances of the duties of the employment’. Incidentally, this rule was introduced in 1853 and included the expense of keeping and maintaining a horse for work purposes!

Where the employer meets the cost of an allowable expqdense, then there are no income tax or NIC implications. The administration of the tax relief for expenses paid for or reimbursed by the employer was simplified from April 2016 with the introduction of an exemption for paid or reimbursed expenses. Under this exemption, qualifying expenses can be paid by employers free of tax and without the need for an employer to apply to HMRC for a dispensation. Such expenses do not need to be returned to HMRC at the end of the tax year on form P11D, and employees do not need to make a claim to HMRC for a corresponding tax relief.

Cost of providing tax relief to employee expenses is significant

The cost of providing tax relief to employee expenses is significant and end of year claims made by employees has risen by 25% between 2009/10 – 2014/15. These claims cost the Exchequer £800 million per year. The government wants to understand more about why claims for non-reimbursed expenses have increased and also to ensure that the rules are effective.

In this year’s Spring Budget, the government confirmed the Autumn Statement announcement that a call for evidence would be published to better understand the use of the income tax relief for employees’ business expenses, with the main objectives being:

  • if the current rules or their administration can be clearer and simpler
  • whether the tax rules for expenses are fit for purpose in the modern economy
  • why the cost to the Exchequer of the tax relief for expenses which are not reimbursed has increased

The call for evidence, which poses 17 questions contained in three sections, is seeking views on:

  • current employer practise on employee expenses
  • current tax rules on employee expenses
  • the future of employee expenses

Whilst there are no plans to remove the relief on employee expenses, the government will use the information gathered from this call for evidence to shape future policy development.

The full document can be found by visiting https://www.gov.uk/government/consultations/taxation-of-employee-expenses-call-for-evidence/taxation-of-employee-expenses-call-for-evidence.

Closing date for evidence is 10th July 2017.

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