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The tax and NICs liabilities on expenses payments depend principally on whether or not they relate to business expenditure by the employee, although there are a number of specific situations. The following notes explain the general principles that apply in each case and the payroll processing and/or P11D reporting requirements.
Any expenses payments for which an employer has obtained a dispensation from the tax office are not reportable of form P11D, not are they liable for Class 1 NICs. The following notes assume that the employer does not have a dispensation covering any of the situations described.
In the following notes, a "lower-paid employee" is an employee whose earnings rate in a tax year is less than £;8,500, including the value of any benefits and expenses payments provided. Any expenses that are reportable rather than being taxed under PAYE are reported on form P9D.
Note that it is not possible to obtain a dispensation to avoid reporting expenses on form P9D. However, a dispensation that is issued for P11D reporting purposes may also apply to benefits and payments that would otherwise have to be reported on form P9D, e.g. the provision of business-related vouchers.
Procedure 1. Expenses that are genuinely business-related
If expenses are business-related, incurred "wholly, exclusively and necessarily in the performance of the duties of the employment", and, where possible, supported by receipts, the payments are reported on form P11D. Typical examples are the reimbursement of accommodation and subsistence expenses, and entertainment expenses.
The full amount of the payment is reported in Section N Expenses payments made to, or on behalf of, the employee, on the appropriate line, less any amount on which the employee, for whatever reason, has already paid tax under PAYE. There is no P9D reporting requirement. There is no Class 1 NICs liability through the payroll if the expenses are "specific and distinct" business expenses or "qualifying travel expenses".
Reporting in this way enables employees to claim a deduction of expenses, i.e. to demonstrate to the satisfaction of the tax office that the expenses were genuinely business-related. This is the normal situation where an employer should obtain a dispensation.
Procedure 2. Expenses that are partly business-related
If the employer is unable to determine how much of the expenses payment is business-related, perhaps because no receipts are provided, the full amount of the payment is reported on form P11D or P9D. This method of reporting also allows the employee to claim a partial deduction of expenses. A typical example would be the reimbursement of an employee's home telephone bill or credit card bill, where the employee has not identified the business and private elements.
The full amount of the payment is reported
- on form P11D, in Section N Expenses payments made to, or on behalf of, the employee, on the appropriate line, less any amount on which the employee, for whatever reason, has already paid tax under PAYE
- on form P9D, in Section A(1) Expenses payments, assuming that the total amount to be reported in that section exceeds £;25.
The entire payment is subject to Class 1 NICs through the payroll. The amount paid by the employer is added to the employee's gross pay in the earnings period in which the payment was made, but for NICs purposes only.
To avoid the Class 1 NICs liability on such a mixed payment, employees should be expected to identify clearly that part of the payment that is business-related. The business-related part of the payment may then be handled separately under Procedure 1, above. The remainder would be handled under Procedure 3, below.
Procedure 3. Expenses that are not business-related
If expenses are not business-related at all, the payment cannot be paid as an expenses payment to the employee, nor is it reportable on form P11D or P9D. Instead, for both employees and lower-paid employees, it is paid through the payroll and is subject to both PAYE tax and Class 1 NICs. In order to increase the employee's net pay by the amount of the reimbursement, the payment must be grossed up for tax and NICs before it is paid. The grossing up of the payment is similar to the procedures for PAYE Settlement Agreements, where the employer pays the tax and NICs instead of the employee.
Typical examples are reimbursement of the employee's personal liabilities, e.g. the employee's rent, or reimbursement of the employee's commuting costs, e.g. when called-out to attend work.
If a payment appears not to be business-related but the employer is at all aware that the employee intends to claim a deduction for expenses in respect of all of part of the payment, it would be better to handle the payment for tax purposes under Procedure 2, above. However, the payment is still fully liable to Class 1 NICs through the payroll.
Special situations
Exempt expenses payments - payments that are made in respect of non-business expenditure but that are exempt from a tax and NICs charge under one of the many statutory exemptions do not have to be reported on form P11D or P9D.
Round sum allowances - the total amount of the payment is handled under Procedure 3, above. If a tax inspector approves an application to pay allowances other than under PAYE, because the allowance is no more than the reimbursement, Procedure 1 or 2 is used as directed by the inspector.
Scale rate payments - in the absence of a dispensation, they are handled as round sum allowances.
Expenses floats - advances of expenses are treated as cheap loans if the outstanding balance exceeds £;1000 at any time or expenditure against the float is not accounted for regularly. Otherwise, procedures 1, 2 or 3 are applied as appropriate.
Payment of mileage allowance payments or passenger payments - such payments in respect of the business use of an employee's own car, van, motorcycle or cycle are not reportable if they do not exceed the statutory maximum payment for the type of vehicle. If the limit is exceeded, the excess is reported
- on form P11D, in Section E Mileage allowance and passenger payments
- on form P9D, in Section A(1) Expenses payments, assuming that the total amount to be reported in that section exceeds £;25.
For Class 1 NICs purposes, the payments are checked for each earnings period and, if the limit is exceeded, the excess is added to gross pay for NICs purposes only.
Qualifying relocation expenses - payments that exceed the statutory limit are reported on form P11D, in Section J Qualifying relocation expenses payments and benefits, and the employer pays Class 1A NICs on the reported value.
Non-qualifying relocation expenses - payments are handled under Procedure 2, above.
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