What is the Difference Between Expenses and Staff Benefits?
Last weeks post was all about the end of the P11d dispensation, but then we got questions about what is an expense and what is a benefit, so beware – this is a long post.
Staff costs are one of the main, if not THE main, cost for businesses. Staff expenses and benefits given to employees can be a bit of a minefield. Some have a taxable benefit, some the company has to pay Class 1A national insurance on, some have no consequences on the staff or the company (except the payment of them). Then we have the joy and fun of completing the P11D and P9D reports at the end of the financial year. That is assuming you don’t have a P11D dispensation! If that’s a little double Dutch, I will explain later.
The purpose of this guide is to give an overview on what is an expense and what is a benefit for an employee. This applies to companies, partnerships and even Sole Traders – the common denominator is that they have to be operating an approved HMRC payroll scheme.
What are Employee Expenses?
In simple terms, these are expenses that are incurred by the employee in the performance of their duties and are directly related to the nature of the employment not linked to their salary/wages. Expenses must also be wholly, exclusively and necessarily incurred in the performance of their duties. Typical examples are business travel mileage in the employee’s own vehicle; incidental overnight expenses when an employee is on business; items purchased for the company on the request of the company.
HMRC will expect:
- The expense was necessary, not just for you, but for any employee doing your job;
- The expense was made while you were actually engaged in your job – and not in an important but related activity;
- The expense must be less than your earnings in that particular job or role;
- The expense must be wholly and exclusively for the particular employment. It must not be, for example, partly for another role or job or for personal reasons.
What needs to be noted is that when an expense is reimbursed to the employee, it has to be ensured that it is an allowable expense for tax purposes on the company otherwise it should be treated as additional taxable income. The cost has to be one that would be incurred by ANY employee of the business and be part of their duties in that job.
Here is an example from HMRC – I’ve changed the name to protect the innocent!
Caroline is a Sales Manager for a large UK company and is asked by her employer to attend a dinner dance for sales staff. She has two small children and needs to pay a babysitter to look after them while she is out. She asks for an expenses reimbursement for the expense of the babysitter. Although the expense may be given, in the taxman’s eyes, the expense is not one that is necessarily incurred in carrying out the duties of her employment. Attending the evening function is not part of the duties of her employment as a sales manager even though her employer has asked her to attend. Nor is the expense one that each and every employee in her employment would have to meet; not all employees would have children. This becomes a taxable expense for Caroline’s P11D.
There are times when a company does not reimburse your expenses that are part of your job. It may be possible to make a claim on your tax return to have you tax code changed to compensate for these costs. They are very closely scrutinised by HMRC and checks often made back to the employer.
Typical costs for this are:
- Professional subscriptions – if you belong to a professional body to be able to do your work;
- Cleaning of a recognisable uniform for example cabin crew can obtain a cleaning allowance for home cleaning and dry cleaning;
- Safety clothing not provided by an employer. If clothing is provided but you go and buy your own, then it becomes non-allowable;
- Travelling costs to get to a client/customer/supplier in order to do your job. The cost of normal commuting to work is a private expense and therefore not allowable.
For costs that have not been reimbursed by an employer, and less than £1000, HMRC can give the relief over the phone by calling the helpdesk. If these costs are less than £2500 for the tax year, then you can use form P87 online to make this claim. If it is over £2500, then you have to register for self-assessment and claim through the tax return process.
There are flat rate allowances that can be obtained in order to make it easier than recording every item of spend. Unless you like having lot of boxes of receipts of course. The flat rate depends on your job. Airline cabin crew can obtain a flat rate allowance of £720 to cover cleaning of the uniform. A full list of allowances can be found here: http://www.hmrc.gov.uk/manuals/eimanual/EIM32712.htm
These rates cover replacement tools, maintenance of tools and special clothing not covered by employer reimbursement. These cover the average spend from 2008/9 but there is nothing stopping you claiming the actual costs.
What are Employee Benefits?
According to the CiPD, “employee benefits are non-cash provisions within the pay and benefits package, although they have a financial value or cost for employers – for example, paid holidays, pensions and company cars. Such provisions may be offered for business reasons (helping to recruit, retain and/or motivate employees as required to achieve organisational objectives) and/or ‘moral’ reasons based on a desire to care for employees’ well-being (and, in so doing, potentially enhance employee engagement.”
Therefore they are:
- something advantageous
- provided to employees and family
- by reason of their employment
- usually as a reward or an incentive for doing the job.
Some employee benefits attract a tax to the employee and a national insurance charge to the employer. For the employee, this will be on your P11D/P9D which is issued by the company before the 6th July after the end of the tax year.
Here is a big cheer. There are some benefits that are not taxed that an employer may give, but there are often caveats with them.
- Annual Parties – the employer must stick to the £150 per annum per person on annual events;
- Health screening and medical check-ups, but if this is part of a healthcare scheme you are registered on, then the healthcare benefit is taxable;
- Job related living accommodation;
- Late night taxis paid for by the company if it is in relation to your work and not like Caroline above and coming back after the office party;
- Long service and suggestion scheme rewards;
- Medical treatment abroad;
- Parking spaces;
- Working from home;
- Workplace nurseries and other employer supported childcare.
Taxable benefits & expenses
And then we get to the down side. The following is a general list of what are taxable benefits & expenses. There are others.
- Reimbursed expenses – as discussed before you may be able to claim this back on your tax return;
- Health/dental insurance
- Gym membership
- Business entertaining expenses
- Car & fuel benefit
- Directors beneficial loan
- Fees & subscriptions if paid for by the employer.
So now you know the difference, you’ll know what needs to go onto the P11D for the current year and what you may be able to give as incentives to stuff without attracting a tax charge.
This article is intended to give general knowledge and thought provokers. It is not designed to be a replacement for professional advice tailored to your exacting needs and circumstances. We cannot give advice to anybody not a client of Herrington Accounting Services or Performance Accountancy, therefore please take advise from your own Accountant. Herrington Accounting services & Performance Accountancy can accept no liability for decisions made or losses incurred through failure to properly consider professional advice or through reliance on this general guide.