Our experts at DSR Tax Claims know how hard it is to find good, quality information about HMRC’s tax regulations that is easy to understand, and that’s why we have created these handy guides to tell you everything you need to know. Our aim is to make life easier for our clients and that is why we want to share our expertise with you. You can also call our friendly team on 0330 122 9972 – we’re the tax experts you can trust.
What counts as a cash sum payment to an employee?
If you are an employer then you probably already know that you have certain obligations to HMRC when you provide any benefits for your employees or pay any expenses on their behalf. These obligations also apply to any cash payments you make to your employees. In this guide, we will explain how you deal with each of the following cash sum payments for business expenses:
- Expenses that are initially paid by your employee and later reimbursed by you as the employer
- Cash sums you give your employees to meet the costs of their business expenses
- ‘Round sum allowances’, where you give an employee a certain amount of money regardless of how the employee then spends that money.
- ‘Scale rate allowances’ that you pay at a level you have agreed with HMRC.
Any payments that you make to cover any private expenses that your employee incurs are counted as additional earnings and should be reported as such and treated as earnings for PAYE and National Insurance purposes.
What are the rules for business expenses?
According to HMRC, an expense only counts as a business expense if your employee needed to spend it in order to do their job. You don’t need to deduct tax or National Insurance on business expenses but it is your responsibility to make sure that they meet all of HMRC’s qualifying criteria for business expenses.
For tax purposes, these criteria are:
- The expense must be one that every employee in that job role would have to incur.
- The expense must be necessarily incurred – if there is an option whether to incur it or not, it doesn’t count under these criteria
- The expense must be incurred while the employee is doing their job or in some way performing business duties
- The expense must be incurred and paid – this means there has to be an actual expense and the employee must have paid for that expense initially
- The expense must be wholly and exclusively so incurred for business purposes – so if the expense was only partly for business purposes but was also for private use, it doesn’t count as a business expense for tax purposes.
For National Insurance purposes, the expense should not in any way represent what HMRC terms as “personal benefit or gain” – so again, it has to be purely for business purposes and must have been incurred directly as a result of your employee’s job.
We have covered business travel expenses as a part of our guides on business travel mileage and travel expenses and we go into more detail there but in short, these expenses also count as business expense and would need to be reported accordingly.
How do you report and pay business expenses?
These expenses need to be reported to HMRC on your P11D form. As long as they meet the aforementioned criteria, there is no need to make any calculations or deductions for PAYE or National Insurance.
If the expenses are covered by exemptions (formerly known as dispensations) then they don’t need to be included in your end-of-year report to HMRC. Exemptions include such business expenses as:
- Phone bills
- Business travel
- Uniforms and tools for work
- Entertainment expenses if they were for business purposes
What are the rules for private expenses?
As far as HMRC are concerned, private expenses cover every other expense that can’t be classed as a business expense, such as an employee’s travel expenses that weren’t necessary as part of their job. If you cover the costs of these private expenses then HMRC count them as additional earnings, so you will need to add them to your employee’s other earnings and deduct the appropriate PAYE tax and Class 1 National Insurance through your payroll just as you would do for their ordinary earnings.
What are ‘scale rate payments’ and how do you report them?
You might provide your employee with a set amount of money to cover their expenses, such as common expenses like travel or meals. HMRC calls these payments ‘scale rate payments’. As long as your employee has spent that money on business expenses, you don’t need to check each and every receipt that they have although you do need to check a sample of their receipts to ensure that the money is going towards business expenses. HMRC recommend that you check a random sample of around 10% of your eligible employees for a period of one month. You will need to satisfy HMRC that the sample is genuinely random (for example, checking every 10th name on an alphabetical list).
To set up a scale rate payment, you can either use HMRC’s benchmark scale rates or you can agree a scale rate with HMRC based on evidence showing your typical expenses (you will need to be able to back this up with evidence like receipts).
HMRC’s benchmark meal rates are as follows:
|Description||Expense amount (up to)|
|One meal (5 hour) rate||£5|
|Two meal (10 hour) rate||£10|
|Late evening meal rate||£10|
The breakfast rate can be paid to employees who leave home earlier than usual and before 6am if they incur the cost of a breakfast eaten away from home after the qualifying journey has begun. If the employee usually leaves before 6am, this rate doesn’t apply. The late evening meal rate can be paid to employees who are having to work later than usual and finish after 8pm (after working a normal day) and are having to buy a meal before the end of their qualifying journey that they would usually have eaten at home. These rates are considered to be exceptional by HMRC and aren’t to be used by employees whose working patterns usually see them working early or late.
The one meal rate can be paid to an employee who has been undertaking qualifying travel for at least 5 hours and has incurred the cost of a meal. Similarly, the two meal rate applies to an employee who has been undertaking qualifying travel for at least 10 hours, incurring the cost of a meal (or meals). These scale payments are limited to 3 meal rates per day (or 24 hour period) and the meal can consist of food and drink.
HMRC haven’t yet set a benchmark rate for overnight subsistence so these rates still need to be agreed between HMRC and the employer, nor has a rate for staying with friends and family while on business travel (in fact, HMRC no longer agree scale rate payments with regards to these expenses and will only look at actual subsistence costs incurred during the stay).
You need to report any scale rate payments to HMRC on your P11D form but PAYE and National Insurance aren’t applicable to these expenses. If the expense is covered by an exemption (or dispensation) as described in the previous section, you don’t need to include these in your end-of-year reports.
What is a ‘round sum payment’ and how is it reported to HMRC?
A ‘round sum payment’ is a set amount of cash provided to an employee to cover expenses, regardless of how that employee spends the money. As far as HMRC are concerned, these payments count as earnings so they need to be added to the employee’s other earnings and PAYE should be deducted as it would be for other earnings. In terms of National Insurance, if there are any specific business expenses which have been covered by the ‘round sum payment’, these need to be deducted from the total allowance before it is added to the employee’s other earnings and Class 1 National Insurance then deducted as necessary.
How can DSR Tax Claims help?
We aim to make life as simple as possible for our clients and that includes giving you the information you need to make your taxes (and your life) simpler and less stressful. Our team of experts at DSR Tax Claims are always on hand to help our clients and our excellent standing with HMRC means that we can make sure you don’t fall foul of their regulations, while claiming your maximum tax relief. We can even take care of all that paperwork and deal with HMRC on your behalf too. Call our friendly team on 0330 122 9972 – we’re the tax experts you can trust.