An exemption regime applies for employee expenses which results in the expenses not only being tax exempt but non reportable on form P11D. This factsheet considers the necessary conditions that must be met for this exemption to apply.
An exemption regime applies for employee expenses. At SKZ Chartered Certified Accountants, we can provide guidance on the rules which, if the necessary conditions are met, result in the expenses being tax exempt and non-reportable on form P11D in the Essex area.
This factsheet considers the operation and reporting of employee expenses and benefits.
The exemption regime
An exemption may apply to the reporting of employee expenses on forms P11D as long as the necessary conditions are met. Under the exemption the business must satisfy itself that the employee would be entitled to full tax relief on the expenses reimbursed.
The exemption
An exemption applies which effectively means that businesses will not have to pay tax and NIC on paid or reimbursed expenses payments or report them on a P11D. The exemption places the onus on employers to determine whether employee expenses are fully deductible for tax purposes.
Types of expenses
The main types of expenses to which the exemption applies are:
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- travel and subsistence expenses
- fees and subscriptions
- business entertainment expenses.
The tax and NIC exemption for employer-contracted childcare and employer-provided childcare vouchers has been very popular with both employers and employees alike. This factsheet outlines the exemptions available.
Childcare and employer provided childcare vouchers are very popular with both employers and employees alike. If your business is in the Essex area or you are employed in the area we, at SKZ Chartered Certified Accountants, can advise you on the exemptions available for employer supported childcare.
Employer Supported Childcare (ESC), commonly by way of childcare voucher, is for many employers and employees a tax and national insurance efficient perk. We consider the implications of this type of benefit on the employer and employee.
ESC, which allows a limited tax and NIC exemption for employer-contracted childcare and employer-provided childcare vouchers, has been very popular with both employers and employees alike. However ESC closed to new members from 4 October 2018. The government has introduced Tax-Free Childcare which is available to employees and the self employed.
Salary sacrifice
Many employers use ESC as part of salary sacrifice arrangements; for example, the employee gives up pay, which is taxable and NIC-able, in return for childcare vouchers, which are not. This may save tax and NIC for the employee and NIC for the employer. Such arrangements have proved to be attractive for many but for those on low rates of pay, such arrangements may not be appropriate.
How much childcare can be provided tax and NIC free?
The limit on the amount of exempt income associated with childcare vouchers and employer-contracted childcare for employees is determined by reviewing the estimated earnings and taxable benefits of the employee. Where the level of estimated earnings and taxable benefits:
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- is equal to or below the equivalent of the sum of personal allowances and the basic rate limit for the year, the employee will be entitled to relief on £55 exempt income for each qualifying week
- exceeds the equivalent of the sum of personal allowances and the basic rate limit for the year as above, but falls below the limit at which tax becomes payable at the 45% rate limit for the year, the employee is entitled to relief on £28 exempt income for each qualifying week.
- exceeds the equivalent of the additional tax rate limit for the year, the employee is entitled to relief on £25 exempt income for each qualifying week.
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For those who joined the employer’s scheme prior to 6 April 2011 the weekly limit is £55 a week regardless of earnings and benefits.
Similar rules apply for NIC purposes.
Further details
The employer has to estimate the employee’s tax position each year as the amount of exempt income they can receive may change throughout their period of employment.
If the ESC exceeds the amount of exempt income per week the excess will be a benefit in kind and subject to Class 1A NICs. However, with vouchers, although any excess is also a benefit in kind it is subject to Class 1 NICs via the payroll. As the tax and NIC issues are complex many employers limit their employees’ entitlement to a maximum of the exempt limit.
The exempt limit applies to the full face value, rather than the cost, of providing a childcare voucher, which would normally include an administration fee.
An employee is only entitled to one exempt amount even if care is provided for more than one child but it does not matter that another person may also be entitled to an exempt amount in respect of the same child.
Determining basic earnings
To identify the rate of tax an individual employee pays in any one tax year, an employer needs to carry out a ‘basic earnings assessment’ for any employees. Employers who offer or provide employer childcare are required, at the beginning of the relevant tax year, to estimate the ‘employment income amount’ that the employee is likely to receive during that year.
This is basically the contractual salary and benefits package (not discretionary bonuses or overtime) less the personal allowance if appropriate.
Employers must keep a record of the basic earnings assessment. These records do not need to be sent to HMRC but must be available for inspection by HMRC if required.
The employer must re-estimate the ‘employment income amount’ for each tax year.
Closure of ESC to new entrants
HMRC has confirmed that employees must have joined an ESC scheme and had the necessary changes made to their salary on or before 4 October 2018. Applying to the scheme before the deadline is not sufficient as an applicant needs to have had the necessary changes made to their salary by the deadline in order to benefit from the income tax and NICs exemption.
Employers who continue to offer ESC to new entrants after 4 October need to deduct income tax and NICs on any vouchers given and pay employer NICs after this date.
Gaps in payment
An employee can ask to stop receiving childcare vouchers temporarily whilst staying in the employer’s scheme; for example, if an employee only works during school term time and doesn’t need the vouchers during the school holidays. Basically, as long as the gap in providing the vouchers doesn’t exceed 12 months the employee can still be classed as an existing member of the employer’s scheme.
This also applies to employees who are on maternity leave, sick leave and those who wish to take a career break, provided that the total length of absence does not exceed 12 months.
Further information
HMRC has provided many questions and answers on their website to help both employees and employers and these can be viewed at https://www.gov.uk/government/publications/employer-supported-childcare
Tax-Free Childcare scheme
The government has introduced Tax-Free Childcare (TFC) a tax incentive for childcare.
The relief is 20% of the costs of childcare up to total childcare costs of £10,000 per child per year. The scheme will therefore be worth a maximum of £2,000 per child (£4,000 for a disabled child). All children under 12 (up to 17 for children with disabilities) are eligible.
To qualify for Tax-Free Childcare all parents in the household must generally meet a minimum income level, based on working 16 hours a week (on average £140 a week) and each earn less than £100,000 a year and not already be receiving support through Tax Credits or Universal Credit.
How does this relate to ESC?
ESC closed to new entrants on 4 October 2018. ESC continues to be available for current members if they wish to remain in it or they can switch to the new scheme but parents cannot be in both the ESC scheme and the TFC scheme at the same time.
Employees need to advise their employer in writing (for example, by email) within 90 days if they start receiving TFC, so their employer can stop giving them vouchers and directly contracted childcare with income tax and NICs reliefs. Employees are not able to return to an employer’s ESC scheme once they have left.
How we can help
If your business is located in the Essex area and you would like to discuss childcare in further detail, please do not hesitate to contact us at SKZ Chartered Certified Accountants.
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All other non-allowable expenses are still reportable on a P11D and/or subject to PAYE (and possibly National Insurance Contributions). Employees are able to claim tax relief in respect of unreimbursed business expenses.
The exemption does not apply to expenses or benefits provided under a relevant salary sacrifice arrangement. This includes any arrangement where an employee gives up the right to receive earnings in return for tax free expenses payments or where the level of their earnings depends on the amount of any expenses payment.
Conditions of the regime
In order for an employee reimbursed expense to be treated as an exempt payment, an employer needs to put himself in the position of the employee. The employer then asks himself the question – would that expense have qualified for full tax relief to the employee (were it not for the amount being exempt)?
An employer should consider:
- setting out a corporate policy of which type of expenses are reimbursable and the need for those expenses to be reasonable
- requiring the completion of a standard expense claim form
- the need for any expense claim to be supported by a receipt
- making checks on expense claims
- requiring a senior person to authorise the claims.
What about scale rates?
The rules allow amounts based on scale rates to be paid or reimbursed, instead of the employee’s actual costs in certain circumstances. Scale rates are generally for travel and subsistence expenses and consist of round sum allowable amounts for specific circumstances.
Two key types of scale rates are available for use by an employer:
- “benchmark” rates and
- “bespoke” rates.
Benchmark rates
Benchmark rates are a set of maximum reimbursement rates for meals. These round sum amounts can be used by employers for payment or reimbursement of employees expenses where relevant qualifying conditions are met.
These rates apply only if the employee incurs expenditure in the course of ‘qualifying business travel’ as follows:
- one meal allowance per day paid in respect of one instance of qualifying travel, the amount of which does not exceed:
- £5 where the duration of the qualifying travel in that day is 5 hours or more
- £10 where the duration of the qualifying travel in that day is 10 hours or more, or
- £25 where the duration of the qualifying travel in that day is 15 hours or more and is on-going at 8pm or
- an additional meal allowance not exceeding £10 per day paid where a meal allowance a. or b. is paid and the qualifying travel in respect of which that allowance is paid is on-going at 8pm.
Bespoke rates
These are rates negotiated and specifically agreed with HMRC in writing. If the business wants to pay bespoke rates for meals or other types of expense, it can apply to HMRC.
HMRC have issued a specific form: PAYE: employers expenses and benefits exemption
Conditions for using approved rates up to 5 April 2019
Employers must have a checking system in place if approved benchmark or bespoke rates are used to ensure that the employee is incurring and paying amounts in respect of expenses of the same kind and that tax relief would be allowed. The exemption is also conditional on neither the payer nor anyone operating the checking system, suspecting or reasonably being expected to know or suspect that the employee had not incurred an amount in respect of the expense.
Conditions relaxed from 6 April 2019
The checking system rules are relaxed and the requirement for employers to check receipts when making payments to employees for subsistence using benchmark scale rates is removed. This applies to standard meal allowances paid in respect of qualifying travel and overseas accommodation and subsistence scale rates. Employers still have to ensure that employees are undertaking qualifying travel.
The accommodation and subsistence overseas scale rates are treated in the same way as benchmark rates. Employers only need to ensure that employees are undertaking qualifying travel.
HMRC has issued guidance on what checking systems they expect employers to operate. We can assist you with this matter or in applying for bespoke rates so please contact us for more information.
Business mileage rates
The key travel and subsistence expenses for many employees are their costs in using their own car or van for business travel. Many employers and their employees use the statutory mileage allowances known as ‘authorised mileage allowance payments (AMAPs). These are scale amounts that employers can pay to employees using their own vehicle for business travel. For cars and vans, the scale rate is 45p per mile for up to 10,000 miles in the tax year and 25p per mile above this.
AMAPs are a separate statutory regime and do not come within the new exemption regime.
For employer provided vehicles the fuel advisory rates can be used to reimburse fuel costs incurred in travelling on business. These advisory fuel rates are updated quarterly throughout each tax year.
Qualifying travel expenses
Qualifying travel is a necessary condition for both travelling and subsistence expenses to be treated as an exempt expense (and also in the use of business mileage rates for cars and vans). A business journey is one that either involves travel:
- from one place of work to another or
- from home to a temporary workplace or vice versa.
However, journeys between an employee’s home and a place of work that he or she regularly attends are not business journeys. These journeys are ‘ordinary commuting’ and the place of work is often referred to as a permanent workplace. This means that the travel costs have to be borne by the employee.
The term ‘temporary workplace’ means that the employee attends the place for a limited duration or temporary purpose. However, some travel between a temporary workplace and home may not qualify for relief if the trip made is ‘substantially similar to the trip made to or from the permanent workplace. ‘Substantially similar’ is interpreted by HMRC as a trip using the same roads or the same train or bus for most of the journey.
There will be many variations of types of journeys undertaken by employees so ensuring that it is a business journey is critical especially as the term ‘travel expenses’ includes the actual costs of travel together with any subsistence expenditure and other associated costs that are incurred in making the journey such as toll or congestion charges. Detailed further guidance is available in HMRC Booklet 490.
How we can help
If you are in the Essex area please do contact us for guidance on the employee expenses exemption and your expenses policy.
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