PAYROLL INSIGHT
Checking benchmark scale rates From 6 April 2019, employers are no longer required to operate a system for checking an employee’s expenditure in order to make payments free of tax in relation to expenses paid or reimbursed using benchmark scale rates. Instead, employers are only required to ensure that employees are undertaking qualifying travel on occasions in respect of which a payment is made or reimbursed and that neither the employer nor any other person knows or suspects or could reasonably be expected to know or suspect that travel was not undertaken. See http://bit. ly/2H5MVAF for further guidance. Employers that pay any non-allowable expenses or provide non-exempt benefits will still need to put those through the payroll and deduct tax and NICs or report them in the P11D return, in accordance with existing practice. Expenses or benefits that are only partially exempted will need to be put through the payroll in full and employees will need to claim a deduction from HMRC on the part that is exempt. Reimbursements, or meeting expenses directly Neither paying cash reimbursements nor meeting the cost of the expenses directly are problematic as they both fall under Business travel is only eligible for tax relief where it is “wholly, exclusively and necessarily” incurred in the proper performance of the employee’s duties under s.336 ITEPA Subsistence is only eligible for tax relief where it is “wholly, exclusively and necessarily” incurred in the proper performance of the employee’s duties under s.336 ITEPA Employee
classified as ‘trivial’ if they cost less than £50 to provide, are not cash or cash vouchers, are not received under the employment contract and are not a reward or in recognition for particular services. Where the employer is a close company and the benefit is provided to an individual who is a director or other office holder of the company (or to a member of their family or household) the exemption is capped at a total cost of £300 in the tax year. If any of these conditions is not satisfied then the benefit is not regarded as being ‘trivial’ and must be taxed in the normal way, subject to any other available exemptions or deductions. Agreements with HMRC It has been a long-held view of many businesses that only benefits in kind are reportable in the P11D return and that business expenses such as travel, subsistence and entertaining do not need to be included. However, this is a misconception. Any items within the benefits code are reportable in the P11D return – the clue is in the return’s name: Expenses and benefits – unless the items have been agreed under an approval notice or, from 6 April 2019, are scale rate payments (http://bit.ly/2PQb7Ls) which are compliant with section 289A ITEPA.
the rules mentioned above and can be exempted or assessed to tax accordingly. However, care should be taken when the expense being reimbursed or paid directly is something which is in the employee’s own name – such as a telephone bill or credit card bill. Meeting bills which are the employee’s legal liability to pay is known as meeting a ‘pecuniary liability’. Different rules exist here because the tax relief available under section 336 of ITEPA is not available unless it can be demonstrated that the amounts are ‘wholly, exclusively and necessarily’ incurred in the proper performance of the employee’s duties. If something contains even a small private element, it is not within the above definition. Deduction for business expenses payments As mentioned above, sometimes, an expense payment is technically still taxable on an employee or director, but tax relief can be obtained on it under sections 336–338 of ITEPA. Travel, subsistence and entertaining expenses are often confusing for employees and employers alike to categorise. To illustrate this point, I have set out below a simple table which shows why the employee is not always taxed on the expense. Usually, if something is not The employer business can claim a deduction from profits in its accounts for travel expenses incurred by employees travelling wholly and exclusively on business The employer business can claim a deduction in its accounts for any subsistence incurred by employees whilst travelling wholly and exclusively on business Employer
Type of expense
Business travel – potentially taxable on the employee but not on the employer
Subsistence – potentially taxable on the employee but not on the employer
The employee must demonstrate that entertaining was taking place to further the course of the business relationship
Client entertaining is “added back” to the business profit figure of the employer business
Entertaining – taxable on the employer and not on the employee
Staff entertaining which falls outside of the annual functions exemption (http://bit. ly/2H215D3) at s.264 ITEPA is treated as a benefit in kind and should be declared in P11D unless the employer settles the liability using a PSA
Staff entertaining is an allowable deduction (http://bit.ly/2YcjAf6) from business profits under s.46 of the Income Tax (Trading and Other Income) Act 2005 as long as it is wholly and exclusively for the purposes of the trade
Staff entertaining – taxable on the staff unless the employer settles it under a PAYE settlement agreement (PSA) or it qualifies as an ‘annual function’
| Professional in Payroll, Pensions and Reward | June 2019 | Issue 51 22
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