Exemption for amounts which would otherwise be deductible: checking systems
S289A(3) ITEPA 2003
Where expenses or benefits are calculated and paid or provided in an approved way under the expenses exemption, employers must have a system in place for checking that all payments made or benefits provided under the terms of the exemption are properly within its scope. The requirements are that:
- employees are in fact incurring and paying expenses of the kind reimbursed and
- that a deduction would (ignoring the exemption) be allowed under Chapter 2 or 5 of Part 5 ITEPA 2003 in respect of those amounts
The introduction of legislation requiring an employer to have a checking system formalises the previous guidance at EIM30059.
The extent of checking undertaken by the employer will depend upon the scale of the business. They will need to demonstrate that someone other than the employee incurring the expense is responsible for ensuring that the payment:
- relates to qualifying travel in the case of travel and subsistence expenses
- does not include disallowable items - the rules in S336-9 ITEPA 2003 (EIM31600 onwards and EIM31800 onwards) will apply, and
- is not excessive.
The form and regularity of the checks will depend on the following factors:
- the size and complexity of the workforce – this will be particularly relevant where the workforce consists of different sections performing different tasks where the entitlement to relief may vary
- uncertainty about whether employees will qualify for an exempt payment – where the temporary workplace rules apply for example (see EIM32000 onwards), employees may qualify for an exempt payment at different times and for differing durations. This should be more closely monitored.
- unpredictable or non-standard work patterns – where scale rate payments have been agreed for irregular working, the employer may want to check that the agreed conditions for breakfast or evening rates, for example, are being met
- the employer has no previous experience in the management of an expenses regime – where the employer has not previously paid expenses you may wish to insist on a larger or more regular sample check
- there is evidence that the employer has failed to manage an expenses regime effectively in the past
- any other risk factors identified by the Compliance Officer.
The check will need to:
- incorporate a review of the completion of the attendance records, diaries, work schedules etc. and supporting receipts obtained and retained by employees sufficient to satisfy the conditions outlined in EIM05200 and EIM30055 and
- be undertaken regularly during the year. This may be monthly, quarterly or half yearly depending on the number of factors present. The checks should involve a review of the receipts retained and claims made by a random sample of staff who should not be given prior notice before or during the period that they will be the subject of review. During any subsequent compliance visit the compliance officer would be able to ask to see details of the periodic checks and the employer should be able to clearly demonstrate that they have been undertaken.
In cases where a number of the factors listed above are present, involve a higher proportion of the workforce.
In smaller organisations where none of the factors outlined above are present, the directors may know all about the particular expenses incurred by employees, and there may be no need for checking at all.
For personal reasons, or reasons of confidentiality, the proprietors of a business, for example, the director/shareholders, may have a free hand in deciding what they take as expenses. If so, it will not usually be appropriate for payments to be exempted for them, but other employees can still be included.
You should, however, consider carefully the reimbursement of subsistence costs, for example, where an independent voucher cannot be supplied. In cases of this kind it is particularly important that it should be clear from the approval notice (see EIM30265) that the exemption applies to a limited class of payments only and does not cover whatever the director decides to take as expenses.
Vouching of expenses
In some instances, lack of an independent voucher or receipt is not necessarily a bar to an exempt payment - for example, parking charges or subscriptions to an approved body under Section 344 ITEPA 2003 (see EIM32880).
It is also likely that while undertaking periodic checks, the employer will find that employees have not, on occasion, been able to obtain or retain receipts for qualifying expenses incurred. The employer must monitor omissions to ensure that there are reasons for the lack of receipts, they are not persistent and do not occur throughout the workforce. They should also, where appropriate, be able to demonstrate any action that they have taken to overcome problems of this sort.
If, as part of their checking process employers identify that the agreed rate within their approval notice is not representative of the expenses employees are actually incurring, they should contact HMRC to discuss amending their approval notice to reflect the true level of expenses incurred. Failure to do so may lead to revocation (link to EIM30265) of their approval notice
Employers should also contact HMRC if their checking process identifies a widespread or significant failure by employees to retain evidence of their spending. Failure to do so may lead to revocation of their approval notice.
Where an employer puts in place a process under which an individual could be withdrawn from receipt of expenses payments where they fail to provide evidence when chosen for subsequent samples following the issue of reminders/warnings from the employer, then this would be seen as good practice. A single individuals failing would not be cause to revoke the employer’s approval notice.
Notice of checking
It is expected that employers will want to remind employees from time to time that they should retain appropriate evidence, usually receipts, to show that they have incurred an expense on the occasions that they receive an expense payment. Employers should not, however, advise individual employees in advance of either the period of review or that they have been selected for a review of their expenses under the employers checking system.