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HMRC internal manual

National Insurance Manual

Class 1 NICs: expenses and allowances: expenses based on an estimate of costs

If an employer operates such a system they can exclude the payments they make from gross pay as long as

  • the scheme used is intended to have no overall profit element
  • the employer bases the payments on an accurate survey or calculation of the costs involved
  • the employer designs the scheme to take account of movements in prices
  • the payments are reasonable in relation to the employment involved.

It is important that the employer makes details of the scheme and its provisions available for inspection. NICs are payable on all payments made under the scheme if the basis of the scheme is not considered sound or is not supported by documentary evidence.

If the scheme for estimating costs is not held to be acceptable for NICs purposes but the employer can identify the actual expense incurred by the employee in carrying out his employment a NIC liability will only arise if there is a profit element in the amount paid.

When deciding whether a scheme is sound or not you should bear in mind the following considerations

  • Is the employer only reimbursing his employees for business expenses actually incurred?
  • Is someone other than the employee claiming the expense responsible for checking and authorising the claim? The position of directors may be different because for personal reasons or reasons of confidentiality they may be able to decide what they draw as directors. It should, however, still be normal for them to have receipts for business expenses and for them to be able to show that the sums were incurred in carrying out the employment.
  • Where possible, claims should be vouched. Employers usually require expenditure to be vouched for their own benefit - to ensure that the employee has incurred it and for audit purposes. In other circumstances, for example in relation to taxi fares, receipts may not be available but employers can still exclude such expenses from gross pay if they are incurred in carrying out the employment as long as they keep a record of the details.
  • Where the employer makes advances of expenses, other than scale rate payments, they should have procedures in place to ensure that the employee fully accounts for the advance and repays any excess. Class 1 NICs are due on the excess if the employee fails to repay it.
  • Does the employee make a claim for each payment?

Although they are not confidential, you should not publicise rates and allowances used by the Civil Service in relation to expenses. We would not want to encourage employers to use them because they may not be reasonable in relation to all circumstances. For instance, the standard of hotel an employer expects an employee to use can vary according to the nature of the business, the employee’ s status within the organisation or the status of the person or business they are visiting.

It is up to the employer to devise a scheme which will result in scale rates which are reasonable in the particular circumstances of their business. They should not seek simply to rely upon Civil Service rates as they may not be reasonable in their circumstances.

See also guidance at NIM06170.