Business Expenses, Benefits and Loans.

Download PDF of Business Expenses, Benefits and Loans

Employee expenses

An employer may reimburse an employee for an expense tax-free if it is incurred wholly, necessarily and exclusively in the performance of their employment (s.336 ITEPA 2003). 

• Where an employee incurs a cost on behalf of the company, tax & National Insurance Contributions (NICs) relief is given by s.336 when he reclaims the cost from his employer.
• Alternatively, he may claim tax relief on his Self Assessment (SA) return (this is less efficient as no NICs saving). This is difficult in practice as s.336 imposes such tight restrictions. 

A benefit that is not taxable is not automatically exempt from national insurance contributions (NICs).

An employer is required to complete form P11D in respect of each employee and all directors.

See our link here p11d-reporting-employee-benefits.

Comprehensive records should be kept in relation to all benefits and expenses payments.

Non-taxable benefits

There are several benefits that are not normally taxable, even when an employee is within the P11D category. These can be substantial. The most significant are:

• Contributions to registered pension schemes
• Car, motor cycle or bicycle parking facilities at or near the workplace
• Certain childcare provision
• Compensation/termination payments up to £30,000
• Redundancy counselling services
• Staff canteen and dining facilities (provided they are available to all directors and employees)
• Sports facilities (provided they are available to all directors and employees)
• Removal expenses, subject to HM Revenue & Customs limits
• Long-service awards (provided they are an established practice within the firm or are in the employees’ contract) up to specified limits
• Awards under suggestion schemes (but there are restrictions)
• Use of a pooled car
• Use of a mobile telephone, including smartphones such as iphones.
• The provision of representative accommodation (except for certain directors)
• Approved profit sharing and share option schemes
• The provision of eye care tests and/or corrective glasses for using computer monitors
• Employer-provided cycles and cyclist’s safety equipment used mainly for journeys between home and work
• Certain bus services for journeys between home and work

You could also consider establishing a company pension scheme, which allows your employees to make additional provision for their retirement by paying regular amounts and additional voluntary contributions.

Employee benefits

Tax efficient benefits can assist your company’s profitability by ensuring that employees receive the maximum benefit from the money spent on their remuneration, thereby helping to retain key staff members.

Most, but not all, benefits are now caught by tax legislation. Most benefits are also caught for national insurance

Entertainment

Tax deduction in business accounts - Entertaining expenditure is disallowed as a deduction for tax purposes (s.45 ITTOIA 2005).

• Staff entertaining is allowable for tax purposes (s.46).
• The general rule for employee expenses (s.34) is that they are allowable for tax providing that they are wholly and exclusively incurred for the purposes of the trade.
  • HMRC may challenge a deduction in a business' accounts if it considers that the primary motive for incurring a cost, such as entertaining, is to obtain a private benefit for a director or employee.

Entertaining expenses

When an employer reimburses entertaining expenses incurred by an employee for:

• Business purposes: HMRC will accept that there is no taxable benefit for the employee.

• Non-business purposes: there will be a taxable benefit. The cost should be reported on form P11D. As entertaining there would be no deduction in the employers' accounts, however, as a staff benefit, the employer should be entitled to a tax deduction.

Further points

Expense claims by employees should provide enough detail to justify the level of entertaining expenditure.

HMRC may challenge any reimbursement by the company if the expense reimbursed is not wholly and exclusively incurred for the purposes of the business. This can potentially lead to double taxation.

• If the company agrees on a PAYE settlement agreement with HMRC to tax the amount reimbursed, it should subsequently be allowable as employment income.

Authorised mileage rates for using own vehicle

How much can you claim for the costs of business travel? How much can be reimbursed by an employer towards the costs of qualifying business travel?

These authorised mileage rates set the amounts that:

• An employer can reimburse an employee for their Business Travel unless a different rate has been authorised by HMRC.
• An employee, who has not been reimbursed for their business travel may claim as a deduction against their employment income unless they agree a different rate with HMRC.
• A self-employed person or landlord can claim as a deduction in their business account in respect of Self-employed business travel, instead of making a claim for their actual expenses.

Cars and vans

	Tax free (per mile)	NICs free (per mile)
First 10,000 miles	45p (from 6 April 2011)	45p (from 6 April 2011)
10,001 and over	25p	45p (from 6 April 2011)

Accommodation and qualifying business journeys

When a director undertakes qualifying travel the cost of the journey, together with the associated costs of subsistence and accommodation, will be allowable for tax.

When a director is working away from home at a temporary workplace, the travel rules permit him to be able to claim not only the full cost of commuting between home and work but also to claim any subsistence costs on route and also the full costs of living away from home. His travel costs may, therefore, include all the costs of board and lodging (accommodation, subsistence and travel) as well as incidental costs, such as the purchase of newspapers, phone calls, toiletries etc.

If a director is away for a reasonable stretch of time, it may be cheaper for the employer to rent accommodation rather than a hotel room by the night. Providing that the director’s visit is part of a qualifying business journey, this living accommodation will not be taxable as a Benefit In Kind (BIK).

HMRC's guidance on this topic is contained in its Employment Income Manual at EIM31836.  

Before including this guidance in their manuals HMRC had set out the following outline conditions (these are not statutory tests, they really rely on common sense):

• Furnished or unfurnished accommodation can be obtained as a cheaper and more convenient alternative to hotel accommodation.
• Provided that the total cost of the accommodation is appropriate to the business need and is reasonable and not excessive we will not restrict the relief available.
• The total cost may include the reasonable cost of furniture where that is properly attributable to the business travel.
• If it can be demonstrated that the total cost of accommodation is reasonable by comparison with the cost of hotel accommodation of an appropriate standard full relief will be permitted.
• HMRC say that they anticipate that relief will only be restricted in a small number of cases.

Loans – Employment related.

An employer may make a tax-free loan to an employee for a sum of up to £10,000 per year.

• Where an interest-free loan is made in excess of the tax-exempt amount a taxable benefit will arise.
• The loan benefit is calculated by taking the outstanding loan balance multiplied by the official rate of interest.
• The beneficial loan interest can be calculated in different ways; an average method may be used.
• Employers need to take some care if there are different loans or loans replacing loans, or if there are loan write offs these are generally taxable as earnings and so PAYE reporting becomes an issue.

Loans to directors and participators

A s455 CTA 2010 tax charge when loans made to directors or other participators (persons with a financial interest in the company) are outstanding more than nine months after the end of the company's accounting period.

An employer may make a tax-free loan to an employee for a sum of up to £10,000 per year.

• Where an interest-free loan is made in excess of the tax-exempt amount a taxable benefit will arise.
• The loan benefit is calculated by taking the outstanding loan balance multiplied by the official rate of interest.
• The beneficial loan interest can be calculated in different ways; an average method may be used.
• Employers need to take some care if there are different loans or loans replacing loans, or if there are loan write offs these are generally taxable as earnings and so PAYE reporting becomes an issue.

The information stated here is valid as at April 2021.