1.1 Purpose of the call for evidence
Many employees incur expenses as part of doing their job which are a part of everyday working life. Some employers will pay for business expenses directly, while others will reimburse their employees for costs they incur. Some employees will pay for the expenses themselves. Either way, the cost of expenses can be a significant consideration for businesses and employees alike. At Autumn Statement 2016, the government announced that a call for evidence would be published to better understand the use of the income tax relief for employees’ business expenses, including those that are not reimbursed by their employer.
Expenses are also an integral part of the tax system as tax relief can be claimed on eligible expenses. The cost of providing this relief is significant. The tax relief on expenses which employers do not reimburse and employees then claim from HMRC costs the Exchequer £800 million per year, and there has been a 25% increase in claims between 2009-10 and 2014-151. When employers reimburse expenses, this does not need to be reported to HMRC (in effect, the expense is just ignored for tax purposes) so the government has limited data on how much the tax relief for reimbursed expenses is worth. Given the significance of expenses to employers, employees and the tax system, the government wants to ensure that the rules are effective, and to understand more about why the claims for non-reimbursed expenses have increased. The treatment of self-employed expenses is out of scope of this call for evidence.
The government has no plans to remove the relief on employee expenses. But given the size and importance of the relief, the government does want to understand the use of the relief better, which is the purpose of this call for evidence. The main objectives of the call for evidence are to understand:
- if the current rules or their administration can be clearer and simpler: this call for evidence responds to the Office of Tax Simplification’s (OTS) review of employee benefits and expenses which recommended a policy review of the expenses system to re-establish some general principles and ensure these are in line with current employment practices and government policies2. It is important that employees and employers are both clear on what tax reliefs employees are entitled to claim and that making these claims from HMRC is as simple as possible.
- whether the tax rules for expenses are fit for purpose in the modern economy: the main principles behind the current tax rules for expenses were introduced in the mid-nineteenth century3. There have been major changes in where and how people work in recent decades, for example a significant shift in employment away from manufacturing and toward the service sector, and workplace practices continue to evolve4. It is therefore important to ensure the tax rules keep up to date.
- why the cost to the exchequer of the tax relief for expenses which are not reimbursed has increased: the reasons behind the rising cost may be appropriate but HMRC has very limited data to explain this increase. The government wants to know what drives the cost of this relief to understand the impact on the exchequer over time and ensure the relief is being used in the way it was intended.
1.2 Evidence sought
Below are 17 questions covering the evidence the government would like to gather. To meet the objectives of the call for evidence outlined above, the government is inviting evidence in the following areas:
- current employer practices on employee expenses
- current tax rules on employee expenses
- the future of employee expenses
The government would like to invite views from anyone with an interest in employee expenses, particularly employers and employees who use the tax relief across all sectors and employer size, as well as tax professionals and advisors. Respondents may want to draw directly from their own experience and a wider understanding of practices in different sectors. Respondents should feel free to provide broad evidence or answer specific questions. The government is particularly interested in quantitative data where possible.
If your responses are based on one particular organisation, please outline details including size of the organisation, sector, nations and regions across the UK, type of worker usually employed and anything else you think would be useful in understanding the use of expenses within that organisation.
1.3 Outline of the current tax rules for expenses
There are a number of expenses employees may incur when doing their job. Broadly tax relief is available when expenses are incurred ‘wholly, exclusively and necessarily in the performance of the duties of the employment’5. Expenses which put an employee in a position to do their job (such as the cost of ordinary commuting) are not eligible for tax relief. There are also provisions for relief for specific expenses, such as professional fees and subscriptions, and travel and subsistence.
When employers pay for or reimburse expenses that are eligible for tax relief, the payment is not taxed. For example, if an employee pays for a train ticket to travel from their permanent office to another office for a business meeting, and their employer reimburses the cost of the train ticket, the reimbursement is not liable to income tax or National Insurance contributions. Sometimes employers may provide employees with round sum cash allowances to cover potential expenses. For example, employees may receive a ‘travel allowance’ in case they need to travel for business trips. As employers give this to employees regardless of whether they incur the expenses or not, these cash allowances are taxed in the same way as other income.
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 without the need for an employer to apply to HMRC for a dispensation. These expenses do not need to be returned to HMRC at the end of the tax year on form P11D, and employees no longer need to make a claim to HMRC for a corresponding tax relief. These changes represent a significant simplification for employers and employees.
When employers do not reimburse expenses that employees have incurred, this can be deducted from an employee’s taxable income. So if an employer did not reimburse the cost of the train ticket, the employee could submit a claim to HMRC after the end of the tax year, claiming tax relief at their marginal tax rate.
These rules apply to a range of expenses employees may have. Some commonly claimed expenses include:
- mileage allowance up to the Approved Mileage Allowance Payment (AMAP) rates where an employee uses their own car for business travel
- business travel and associated expenses
- professional fees and subscriptions to professional bodies
- stationery for business use only
- telephone charges for business calls
- household expenses in the limited circumstances where an employees’ home is a workplace
For some expenses which are not reimbursed, employees can claim a flat rate expense allowance. HMRC has agreed allowances based on the amount typically spent each year by employees in a wide range of industries and occupations to remove the burden for employers and employees of calculating a large number of small claims and retaining evidence for these. For example, employees who need to pay for the cost of repairing and maintaining tools and specialist clothing for work can apply for tax relief in this way.
When employers do not reimburse expenses which are eligible for tax relief, some employees choose to claim the tax relief through an agent. Agents submit the claim for tax relief to HMRC on the employee’s behalf and often charge a flat rate or commission for providing this service. HMRC has evidence that the use of agents is increasing and would like to understand why employees are choosing to use agents instead of claiming the relief directly from HMRC.
Guidance on how to make a claim for tax relief, including links to relevant forms, can be found on GOV.UK. Claims for amounts up to £2,500 can easily be made online through your Personal Tax Account (PTA) or by printing and posting form P87. Claims for amounts of £2,500 or more can be made by completing a Self-Assessment tax return. When agreeing a claim, HMRC often makes an adjustment to the tax code, which means that the employee receives the tax relief throughout the year and in subsequent years.
2. Consultation questions
2.1 Section 1: Current employer practices on employee expenses
The government wants to collect evidence on expense practices to ensure the taxation of expenses keeps pace with the modern workplace. The way people work is changing, for example, there have been major shifts in employment away from manufacturing and toward the service sector. This may influence employers’ decisions and employees’ expectations on how expenses will be treated. The workplace environment itself also continues to evolve, with remote working and new forms of technology to help people do their jobs. These changes will impact what expenses employees have and which expenses employers reimburse. The government would also like to understand if these changes contribute to the increased cost of the tax relief.
How expenses affect employers
What expenses do employers pay for or reimburse?
- Does this vary between employees, for example, employees on different salaries or on different types of contract?
- Are there different practices in different sectors?
- Please set out your expense policy if applicable.
How do employers set expense policies? For example, is the type and level of expenses that will be reimbursed set out in contracts, through informal arrangements or on a case by case basis?
- What are the main factors employers consider when deciding whether to reimburse an expense?
- If employees are incurring expenses that would be eligible for tax relief, why might the employer not reimburse the expense or not reimburse the expenses in full?
- What do employers who don’t reimburse tell their employees about claiming tax relief?
Do employers pay for employee expenses with cash allowances rather than reimbursing specific expenses?
- If so, what factors do employers consider when offering a cash allowance including how much they decide to give?
- Do employees receiving a cash allowance claim for relief on expenses?
Employees’ expectations of how their employer will treat their expenses
What work expenses do employees normally incur? Please include any data you have on which expenses employees claim for reimbursement from their employer and how frequently employees do this.
Do employees expect their employers to reimburse expenses?
- What factors does this depend on, for example, does the size of the organisation or sector influence employees’ expectations?
- Do employees influence their employer’s expense policy and does whether an employer reimburses or not impact the retention and recruitment of employees?
What evidence are employees expected to provide to their employers of their expenses?
Do employers know of employees who incur expenses which are not reimbursed and which would qualify for tax relief from HMRC?
- If so, why are these expenses not reimbursed and do employers know if employees are claiming a tax relief from HMRC?
Changes in expense practices
Has the type and amount of expenses employees incur changed in the last 5-10 years and, if so, how and why?
- Does this vary by sector or the type of expense?
Has the type and amount of expenses employers reimburse changed in the last 5-10 years and, if so, how and why?
- Does this vary by sector or the type of expense?
2.2 Section 2: Current tax rules on employee expenses
This section focuses on the tax rules and their administration. For the tax rules to be effective they need to reflect the changes in the labour market described in section one. They should also be clear and straightforward for employers and employees to use. The government wants to ensure employees are aware of what they are entitled to and that the process for claiming tax relief directly from HMRC is straightforward and clear.
Reflecting modern working practices
Do you think the scope of the current tax relief for employee expenses reflects the expenses employees have today?
Are there any types of expenses that are currently eligible for relief where that no longer seems appropriate, and why?
Are there any expenses which don’t fall within the current exemption which you think should and why?
Do HMRC’s rules on expenses guide employers’ expense policies? For example, do some employers only reimburse expenses which qualify for a tax relief?
How employees claim the tax relief
Do employees know the rules for expenses and how to claim for expenses which are not reimbursed?
- How do employees find this information?
Do employees usually claim directly or indirectly from HMRC?
Why do employees claim in different ways and does this vary by the type of expenses?
Do employees use agents to claim on their behalf? If so, why do employees do this? How much are they claiming for and how much does it cost to use an agent? Please provide data if possible.
Do you think the use of agents has become more widespread? If yes, why do you think this is the case? Please provide data if possible.
Do employers ever claim a tax relief for expenses which aren’t reimbursed from HMRC on their employee’s behalf? If so, why?
Are flat rate expense allowances still appropriate?
- If flat rate expenses allowances were not available, would employers reimburse these expenses?
Do you have any other suggestions for how the tax rules could be made clearer or their administration could be simplified for employers and employees?
- How could HMRC make it easier for employees to claim the tax relief directly and do employees know that making a claim directly from HMRC is a free service?
2.3 Section 3: The future of employee expenses
The government wants to ensure that the tax rules for employee expenses are fit for purpose in future. Therefore it would useful to understand whether respondents expect expense practices to change and what will influence these changes.
How do you expect expense practices to change in future?
Do respondents think there will be a wider range of employee expenses?
Will the type of expenses employees pay, and claim for, change?
What factors will influence employers’ decisions whether to reimburse or not in future? Will employers be less inclined to reimburse certain expenses?
What are the contributing factors to these changes?
Are there areas of the tax treatment for expenses that the government should explore further?
3. Next steps
The deadline for responses to this call for evidence is 10 July 2017. If you are interested in attending a meeting to discuss this work or would like to send a representation by email, please email email@example.com. Representations by email are preferable but hard copies can be sent to:
Personal Tax Team
1 Horse Guards Road
Paper copies of this document or copies in Welsh and alternative formats (large print, audio and Braille) may be obtained free of charge from the above address. This document can also be accessed from GOV.UK. All responses will be acknowledged, but it will not be possible to give substantive replies to individual representations.
When responding please say if you are a business, consultancy, individual or representative body. Please provide demographics of your organisation; in the case of representative bodies, please provide information on the number and nature of people you represent.
This call for evidence will inform future policy development. The government will set out its intentions once it has considered the responses received.
Information provided in response to this consultation, including personal information, may be published or disclosed in accordance with the access to information regimes. These are primarily the Freedom of Information Act 2000 (FOIA), the Data Protection Act 1988 (DPA) and the Environmental Information Regulations 2004.
If you want the information that you provide to be treated as confidential, please be aware that, under the FOIA, there is a statutory Code of Practice with which public authorities must comply and which deals with, amongst other things, obligations of confidence. In view of this it would be helpful if you could explain to us why you regard the information you have provided as confidential. If we receive a request for disclosure of the information we will take full account of your explanation, but we cannot give an assurance that confidentiality can be maintained in all circumstances. An automatic confidentiality disclaimer generated by your IT system will not, of itself, be regarded as binding on HM Treasury.
HM Treasury will process your personal data in accordance with the DPA and in the majority of circumstances this will mean that your personal data will not be disclosed to third parties.
Source: HMRC data ↩
Office of Tax Simplification. ‘Review of employee benefits and expenses: Interim report’, August 2013, page 7 ↩
The ‘wholly, exclusively and necessarily’ incurred in the performance of an office rule was introduced in 1853 and included the expense of keeping and maintaining a horse for work purposes. ↩
Between June 1978 (when comparable records began) and September 2016 the proportion of employee jobs accounted for by the services sector increased from 63% to 85%. Source: HMT calculations using ‘JOBS03: Employee jobs by industry’, ONS, December 2016. ↩
Section 336(1) Income Tax (Earnings and Pensions) Act (ITEPA) 2003: the general rule is that a deduction from earnings is allowed for an amount if – (a) the employee is obliged to incur and pay it as holder of the employment, and (b) the amount is incurred wholly, exclusively and necessarily in the performance of the duties of the employment. ↩