What procedure should be used when an employee or director makes a purchase on behalf of the employer?

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(In these notes, the term "employee" includes a company director.) When an employee makes a purchase in a shop, restaurant, petrol filling station, etc., the legal position is that the employee is assumed to be making the purchase and is, therefore, personally liable to pay for the goods or services. The method of payment does not change the situation. The fact that the employee uses the employer's credit card to pay for the goods or services, or pays cash and is subsequently reimbursed by the employer, does not change the fact that a contract has been formed between the employee and the vendor, not between the employer and the vendor.

As a result, when the employer pays the credit card bill or reimburses the employee's expenditure, the employer is settling the employee's debt. Such a payment falls within the definition of "earnings" for NICs purposes. For tax purposes, the employee has received a benefit that is "money's worth", i.e. "of direct monetary value" to the employee. A liability for both tax and Class 1 NICs arises at the time payment is made to the credit card company or the expenditure is reimbursed.

• For tax purposes, the amount of the payment is reported
  
  
  • in the case of a credit card payment, in Section C of form P11D or in Section B of form P9D, as appropriate,
    
    
  • in the case of a reimbursement, in Section N of form P11D or in Section A(1) of form P9D, as appropriate.
    
    

• For Class 1 NICs purposes, the amount of the payment is added to gross pay for NICs purposes in the earnings period in which the credit card bill is paid or the expenditure is reimbursed.

However, liability for Class 1 NICs can be excluded to the extent that the payment can be shown to cover specific and distinct business expenses.

Example: Using the employer's credit card, an employee buys a digital camera for £300 and some stationery for the business costing £100. He does not indicate that he is entering into a contract as agent for the employer. The employee is able to use the camera for both business and personal use, but the stationery is exclusively for business use. The employer subsequently settles the credit card account. For tax purposes, the employer must report the £400 in Section C on the employee's P11D and the employee may claim tax relief on the £100. There is a liability for Class 1 NICs on the £300 payment and that amount must be added to the employee's gross pay in the earnings period in which the credit card account was settled. However, there is no NICs liability on the £100 purchase as it was a specific and distinct business expense.

The situation described in this example would have been different if the employee had made it clear at the time of purchase that he was acting as agent for the employer, perhaps by obtaining a receipt that was made out in the employer's name. In that case, there would still have been a tax liability, reportable in Section L of form P11D as an asset placed at the employee's disposal. The employee would not, however, have had an NICs liability as the benefit is liable for Class 1A NICs, paid by the employer.

To avoid the Class 1 NICs liability problem altogether, the employee, when making purchases on behalf of the employer, must make it clear at the time of "point of sale" that the contract is between the employer and the vendor. The point at which the contract between vendor and purchaser comes into effect is not necessarily at the time that the cash or credit card or fuel card is proffered in payment. Examples of the point of sale for different types of transaction are:

• when buying fuel from a filling station, at the time the vehicle is filled up
  
  
• when eating in a restaurant, at the time the order is placed
  
  
• in shops, at the time of payment.

If, at the point of sale, it is clear to the supplier that the purchase is being made by the employee acting as agent for the employer, there is no liability for Class 1 NICs, regardless of how the bill is settled. To achieve this, the employee may, for example, present a purchase order from the employer, obtain a receipt made out in the employer's name, or simply state that the purchase is being made on behalf of the employer.

Perhaps the most critical situation where this procedure should be followed is when an employee purchases fuel for a company or private vehicle using cash or the employer's credit card or fuel card. If an employee simply fills the car with fuel at a filling station and uses cash or the fuel card to make the payment, the contract for the fuel has been made by the employee personally with the supplier. A liability for Class 1 NICs arises at the time the credit card bill is settled by the employer or the expenditure is reimbursed.

As the fuel purchased for a vehicle may be used for both private and business use, this liability for Class 1 NICs cannot be reduced under the "specific and distinct" business expense provision. Both the employer and employee must pay Class 1 NICs on the full cost of the fuel.

To avoid the problem, a procedure that has come to be known as the "litany" must be used. There is no Class 1 NICs liability if

• the employee is authorised to make purchases on the employer's behalf, and
  
  
• the employee explains to the vendor in advance of the contract for purchase that the purchase is made on behalf of the employer, and
  
  
• the vendor accepts that the purchase is made on behalf of the employer.

It is clearly impossible to tell whether, in any particular case, an employee has made it clear to the vendor in advance of the contract that the purchase is made on behalf of the employer. It is essential, therefore, that the employer has evidence, in the form of a written instruction, that employees who pay by cash or use credit cards in this way are actually authorised to enter into a contract on behalf of the employer and know the procedure and are required to follow it.

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