Coding: coding deductions and expenses: expenses
Employees or directors are entitled to relief for expenses which they have to incur in actually doing their job. The Employment Income Manual (EIM) at EIM31610 onwards provides guidance on which expenses you can allow.
You may receive requests for expenses deductions from
- Individuals or groups of employees following press publicity
- Tax Code Agencies
- Employers on behalf of their employees
- Trade Union representatives on behalf of their members
Most employees will ask for an expenses deduction by giving details in a letter or statement. This is acceptable. Otherwise they may use form P87.
You will often receive a request for one year from one employee who is presented as a ‘test case’. If this is accepted, you are likely to receive similar requests for previous years for that employee and then for all years for most of the workforce of a particular employer. It is therefore important that you consider the guidance carefully before you accept that relief is due.
Whether or not an employee qualifies for a deduction under S336 ITEPA 2003 will depend upon the facts of the case. Guidance on the interpretation of the statutory tests in S336 is given at EIM31610 onwards. This guidance applies as much to bulk requests as to individual ones. Particular regard should be paid to the `objective nature’ of the S336 test and whether the expenditure was incurred `in performance of the duties’ (EIM31640 onwards). Essentially the question is whether the duties of the employment impose the expenditure in question rather than the personal circumstances of the employee or even the wishes of the employer. Employment income expenses can only be set off against earnings from the employment to which the expenses relate. EIM31655 refers. If the expenses exceed the earnings, or if the occupation in question does not produce any earnings, the excess expenses cannot be set against earnings from any other employment that the individual may have.
When dealing with bulk requests, bear in mind that one employee may satisfy the test but other employees could have different duties, which means they are not entitled to the relief. Also there may be some similarities between the duties of employees of one employer compared with the employees of another employer but important differences in fact could mean that the treatment may differ.
Locally agreed expenses (FRE)
If you make a local agreement with an employer for flat rate expenses (FRE) or a fixed rate amount that differs from the nationally agreed FRE amounts, you must record details of the agreed amounts on the EBS Employer record in Employer Notes. Enter details in the ‘Locally Agreed Expenses’ field using Function AMEND EMPLOYER NOTES.
FRE for police officers
If the police force has an arrangement regarding FRE which differs from the nationally agreed amounts / guidelines, including net pay schemes, this should also be clearly noted on the EBS record.
The remainder of this subject is presented as follows
Abbreviations used in coding
Different descriptions are used to describe different types of expenses. This enables the system to treat each type differently. For example, Flat rate expenses can be automatically updated at annual coding. Take care to use the correct description
|Flat rate expenses|
|Professional fees / subscriptions|
|Hotel and meal expenses, given as Job expenses|
|Other expenses, given as Job expenses|
|Vehicle expenses, given as Job expenses|
|Mileage allowance relief (MAR), given as Job expenses|
Note: SA autocoding updates Job expenses, therefore if updating an SA customer’s record with details of their hotel and meal expenses, Other expenses, Vehicle expenses or Mileage allowance relief (MAR), you should update the Job Expenses field in IABD. Do not include the amount in any other expenses field as this may result in the customer receiving duplicate expenses within their tax code when SA autocoding takes place; see PAYE130050.
Appeals and calculations
An individual within SA can include the disputed expense in the SA return. HMRC can then open an enquiry. The taxpayer has a formal right of appeal if he disagrees with the result of our enquiry. Individuals not within SA will have to be brought into SA for the year of the dispute.
For in-year disputed claims, the individual can appeal against the coding. Guidance on coding appeals is given at PAYE13075 and EIM71420.
Capital allowances: Writing down allowance for cars
Capital allowances for cars (and other mechanically propelled road vehicles) are only available for claims up to 5 April 2002. Instead, for 2002-03 onwards, employees can obtain Mileage Allowance Relief, which includes an element for depreciation. See also EIM31330.
Capital allowances: Writing down allowance for items other than cars
Examples of how to calculate writing down allowances and balancing adjustments are given at EIM36500. Use the description ‘Job expenses’ to give capital allowances.
You should send a computation of the revised allowances when you amend the code.
Cleaning protective clothing and uniforms
Guidance on the treatment of deductions for the cost of upkeep of protective clothing and uniforms is provided at EIM32465 onwards. No relief is due for the cost of cleaning `ordinary clothing’ that is worn at work.
Where the conditions for relief are satisfied then it is merely a question of fact to ascertain what has been spent, necessarily, by the employee on the maintenance and upkeep of the uniform or protective clothing.
EIM32480 onwards states that the allowable costs should not include notional amounts such as labour costs when cleaning is carried out as part of an ordinary domestic wash. However, the real costs involved in washing clothes at home can be allowed. Consequently, provided the employer does not make any provision for the laundering of these items, some deduction may be due.
The amount of the deduction will depend on the nature of the clothing and the frequency with which it is washed, taking account of the additional direct costs of washing these items at home. EIM32485 suggests amounts that may be accepted as reasonable.
Descriptor to use for earlier years relief
The earlier years adjustment for the tax and supplement must be identified clearly on the coding notice, as a separate item from the current year’s relief. PAYE130050 gives guidance on how to complete the EYA entries in the income, allowances, benefits and deductions screen.
The description ‘Earlier year’s adjustment is displayed on the notice of coding. A note and the EYA calculation will be automatically included on the P2.
Current year’s relief
If an allowance is due, give relief for the current year in the CY coding as ‘Job expenses’.
Employer makes expenses payments to employee
You must find out if the expenses payments made by the employer will be included in the employee’s taxable pay. This must be made quite clear to all employees concerned.
Flat rate expenses (FRE)
Many workers are obliged to spend small amounts of money each year in maintaining tools and special clothing that are necessary to carry out the duties of their employment.
To allow these small claims in an efficient and cost effective manner, HMRC has agreed national Flat Rate Expenses (FRE) with trade unions or other bodies. This avoids many separate claims and ensures uniformity of treatment for employees doing the same job. The customer also benefits from less paperwork as they are not required to keep a record of all the individual amounts they spend.
FRE are only permitted where an expense is necessarily incurred by an employee (see EIM32710). Section 367 ITEPA 2003 states FRE are intended to represent the average annual expenses incurred by employees on repair, maintenance and replacement of loose tools and special clothing.
You should deal with claims based on the information provided by the employee, subject to the industry and occupation being listed at EIM32712 or covered by EIM32485. No formal claim is necessary, therefore where the employee qualifies for FRE this should be awarded for CY, even where a specific claim has not been made. If you are able to confirm that the allowance is due for earlier years, you should calculate an EYA coding adjustment, as advised below.
Multiple claims for FRE
An employee is entitled to receive FRE for each qualifying employment held, where they are required to maintain tools or special clothing, unless the tools and special clothing required can be used for each employment.
As FRE includes amounts in respect of maintaining special clothing, an employee cannot receive FRE and also claim further expenses (EXP) under S336 for cleaning protective clothing or uniforms.
Dealing with a FRE claim
You should follow the guidance in the action guide tax40021, when dealing with a FRE claim.
Removing FRE from a tax code
When an employment ceases for which FRE was given
- CY - Leave the full amount of FRE in the tax code
Note: FRE should not be apportioned.
- CY+1 - Remove the FRE from IABD if the nature of employment has changed or cannot be determined in CY
- CY+1 - Leave FRE in the tax code if the nature of employment remains the same and / or there is an agreement noted on EBS, or, if it is covered in the Table of Agreed Amounts at EIM32712
For general guidance regarding FRE see EIM32700 onwards. For further guidance on the treatment of FRE for
- Healthcare workers see EIM66790
- Nurses see EIM67210
- Airline pilots see EIM50050
- Police officers see EIM68130
If the customer asks for a P87 for an earlier year, you will need to issue the form manually.
A P87 will be issued automatically with a targeted review form where job expenses in an individual’s code for CY-1 are more than £999 but below £2,501.
Do not issue Form P87 to employees who receive
- Refunds of expenses at cost
- Payments on a fixed scale
- It is accepted that these sums will never give rise to a benefit
Formula for EYA coding adjustments
Where the facts of the case determine that relief is due for earlier years for flat rate expenses, job expenses or professional subscriptions, relief can be included in the current year’s tax code through the earlier year’s adjustment. To work out the EYA the system will calculate the total amount of tax overpaid together with supplement for all years and then convert the figure to a coding adjustment. The coding adjustment is calculated by reference to the individual’s rate of liability. Make the appropriate entries in the income, allowances, benefits and deductions section (PAYE130050).
Handling bulk requests
The guidance applies equally to requests made by individuals and those made by or on behalf of a group of employees. In each case the approach should be to give relief by way of coding adjustments covering all years involved or, if the individual opts for a repayment, through SA or by Informal Calculation.
Where a single request is received on behalf of a group of employees you will need to decide how best to handle this. Determine who is entitled to relief and for what years. The employer might agree to provide details of employees for whom the necessary conditions for relief are satisfied and the length of each person’s service. They may also be able to help by telling employees how you will be dealing with the relief due.
The number of individual requests will be a factor in deciding how you will proceed. However, making a single repayment covering all individuals is not an option. Similarly, a repayment must not be made to a nominee on behalf of any individual without that person’s signed authority.
There is an automatic process available to amend codes when you agree job expenses or FRE are due to a large number of employees of the same employer, possibly for earlier years as well as for CY. This is explained at PAYE12030.
Handling requests for expenses
You must bear in mind the following points when deciding how to deal with expenses
- Your approach should be consistent whether you are dealing with one employee or one of many in respect of the same workforce
- Notwithstanding the above point, all individual’s still have their individual rights to identify specific circumstances which may have a bearing on their particular case and to pursue a point by way of appeal
- The PAYE system and end of year reviews tend to operate to the individual’s advantage. Consequently, individual’s will benefit more from coding adjustments than from end of year calculation of liability
- It is legally permissible to deal with an overpayment by coding out provided that the adjustment is clearly identified on the coding notice
- Where the individual asks for a repayment, the precise amount of the overpayment for earlier years should be established. Follow SA procedures for SA cases. For non-SA cases, enter the allowable job expenses in the income, allowances, benefits and deductions area for the relevant earlier years and end of year reconciliation will calculate the individual’s liability for the relevant year(s)
Local government councillors
General advice on local government councillors is at EIM65920 onwards.
These employees may choose to have tax deducted at basic rate from either
- All the payments received
- The net amount after deducting relief for estimated expenses
Code BR should be used whichever method is chosen.
Ministers of Religion
For further guidance see ‘Criteria for an SA record’ at SAM100060.
Previous year’s relief
To minimise the work involved, it is recommended that you
- Calculate the tax overpaid and the repayment supplement
- Convert the result into a coding adjustment, see ‘Formula for EYA coding adjustments’ above
However, if the individual exercises their right to opt for a repayment rather than a coding adjustment, repay SA cases using SA procedures and for non-SA cases enter the allowable job expenses in the income, allowances, benefits and deductions area for the relevant earlier years and end of year reconciliation will calculate the individual’s liability for the relevant year(s).
Professional fees and subscriptions
Guidance on what you can allow is at EIM32880 onwards. Give relief on these payments as Professional subscriptions. List 3 shows the list of approved bodies and the allowable payments.
A professional body may apply for approval in one year and obtain it in a later year. Members may then claim relief for a past year. List 3 will tell you the first year of relief.
When this happens, an adjustment for earlier years can be included in the current year code using the description ‘Earlier year’s adjustment’.
However, if the individual exercises the right to opt for a repayment rather than a coding adjustment, repay SA cases using SA procedures and for non-SA cases enter the allowable job expenses in the income, allowances, benefits and deductions area for the relevant earlier years and end of year reconciliation will calculate the individual’s liability for the relevant year(s).
Requests for expenses deductions to be removed from tax code
Where a tax agent or employee requests that no coding adjustment is made in respect of their client’s / own expenses for current or future years, follow the guidance below. By agreeing to such a request in a case where expenses are continuing to be incurred it enables each year’s actual expenses claim to generate a repayment. It is our business to ensure that we issue a tax code that will collect the right amount of tax and that we treat all taxpayers in a consistent manner.
When considering a request that no adjustment be made to a tax code in respect of expenses payments, it is necessary to remember that
- Section 685 ITEPA puts us under an obligation to secure, as far as possible, the correct amount of tax payable under PAYE in the tax year
- Regulation 14 of the Income Tax (Pay As You Earn) Regulations 2003 (‘The PAYE Regulations’) requires us, in determining a code, to take account of all relevant matters, so far as they are known to us, so that the obligation under section 685 is satisfied
The legislation does not permit us to agree to over deductions and cannot be disregarded just because an agent or employee wants us to. The whole purpose of establishing tax codes in PAYE is to enable the correct amount of tax to be deducted from the employee; the employee will have the benefit of paying less tax during the year.
Where in previous years expenses have been due year on year, there is an obligation to code out an estimated amount, provided it is a reasonable estimate and expenses continue to be incurred in the current year. The general consideration should be to look at the level of expenses claimed in earlier years and base the current year’s expenses and deductions on that sum.
If the agent or employee is not happy with this the onus is on them to provide details of any change of circumstances to enable us to determine what the correct code should be. If they do provide such information indicating that expenses should not be included in the current year’s code (for example they confirm that no expenses have been or will be incurred in the current tax year) the code should be amended to remove the expenses. Otherwise estimated expenses should not be removed from a code unless the employee or agent provides a valid reason why expenses should not be included.
If you cannot settle the matter by agreement you should write to the taxpayer setting out your decision, they have 30 days from the date you issue the decision letter within which to send you an appeal. Once they have appealed you may offer a review or the customer may request a review by HMRC. Alternatively, they may appeal to the First-tier Tribunal - see ‘Appeals Review and Tribunals guidance’ (ARTG) for more information about what to do if you receive an appeal.
Round sum allowances
As a rule, employers must include round sum expenses payments in taxable pay.
Specific expenditure reimbursed
Specific reimbursements of private expenditure, such as home to work travel expenses, should be included in taxable pay and PAYE should be applied.
Reimbursements of other expenses, (including payments at scale rates approved by HMRC), related to the employment should not be included in taxable pay for any employees, and PAYE should not be applied. Instead they should be returned on form P11D for directors and employees earning at the rate of £8,500 a year or more. The amounts returned can be coded out, after taking into account any relief due against the amounts under S336 ITEPA 2003.
Using own vehicle for work
Until 5 April 2002 employees are entitled to get a deduction for the actual costs that they incur in using their own vehicle for business travel. From 6 April 2002 employees can no longer get a deduction for their actual expenditure. Instead, employees are entitled to mileage allowance relief (MAR). Use the description ‘job expenses’ when giving relief in coding or an informal calculation.
EIM31205 gives an overview of the technical details of ‘Using own vehicle for work’.
Washing ‘company cars’
It is very unlikely that S336 would give relief for the cost of washing a company car. Although it may be specified in the car agreement with the employer that the employee keeps the car clean, that is usually a condition governing availability of the car and nothing to do with the objective requirements of the duties of the employment.
The general position can be contrasted with the situation of an individual employed as a chauffeur or car valet whose duties are more likely, on an objective analysis, to include keeping the car clean.
There is no reduction from the car benefit charge in respect of car cleaning costs paid by the employee. See EIM32400.
Although a deduction is not available to the employee for the cost of washing the company car, a benefit is not chargeable on the employee if the employer bears the actual cost of washing the car. That is because of specific exemptions (see EIM23005).