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A simple guide to employee expenses

A Simple Guide to Employee Expenses

Employee expenses can be easy for staff to write off as simply saving the receipt for something they had to pay for, and claiming it later through expenses. The truth is that there are strict rules outlined by HMRC around what employees can expense and what they can’t. Here’s a simple guide to allowable employee expenses.

What are employee expenses?

When we talk about employee expenses, it refers to costs incurred by an employee for something they need for their job. Employers can reimburse the employees if:

  • The expenses are classed as ‘wholly and exclusively’ for business purposes.
  • There are receipts of the expenses.

Record keeping

Any accountant will tell you how important it is to keep good records for your accounts. With employee expenses, HMRC asks you to keep a record of:

  • the date and details of every expense or benefit you provide,
  • any information needed to work out the amounts you put on your end-of-year forms, and
  • any payment your employee contributes to an expense or benefit.

Ask your employees to keep receipts and bills in case they’re needed as proof. To avoid these being misplaced, it can be helpful to store online copies. Online accounting software, such as, Xero, makes it easy to record expenses and comply with Making Tax Digital.

Staff can’t check their own expenses, so someone else within your company will need to do this. This is to make sure that all claims are legitimate expenses. For smaller business, this may be more difficult. And in those cases, consider asking your accountant to verify expenses for you.

What is wholly and exclusively?

Put briefly, it means any expenses that qualify as ‘business expenses’ or ‘business travel’ can be reimbursed by the employer, without incurring any additional tax. Be aware that you may be charged a penalty by HMRC if you carelessly or deliberately give inaccurate information in your tax return.

What can be claimed through employee expenses?

  • Business travel – travel expenses for a client meeting or required training would be considered business travel. But, your usual commute to and from work would not be.
  • Parking if visiting a client or training for example.
  • Work clothes – if you have to wear protective clothing or a uniform.
  • Accommodation costs – if you have to travel, then a fair and reasonable hotel bill would be accepted.
  • Mobile phone – if 40% of the calls are made for work, then you can claim 40% of the cost.
  • Stationery – paper or other items needed for the office.
  • Gifts – if you buy a gift for less than £50, it’s not cash/ a voucher, it’s not related to work performance or part of their employment contract.

An A-Z of expenses can be found here or ask you accountant to clarify things for you.

And just to show that expenses are actually scrutinised, here are some real-life examples, submitted to HMRC, that were not legitimate claims.

  1. Luxury watches as Christmas gifts for staff – from a company with no employees
  2. Pet food for a Shih Tzu ‘guard dog’
  3. Armani jeans as protective clothing for a painter and decorator

IR35 and expenses

IR35 legislation was introduced to ensure that off-payroll and on-payroll workers are taxed fairly and accordingly. This means that if a contractor is working under the exact same conditions as a contracted employee, then the contractor pays the same tax and National Insurance contributions as their employed counterpart.

If you are working as a contractor inside IR35, you cannot claim the same expenses that you can when working outside the rules. Travel, accommodation and meals, for example, are not legitimate on inside IR35 contracts.

Before you put in an expense claim

Remember, that if you’re a sole trader or a partner, you’re self-employed rather than being an employee and different rules apply to you. Ask your accountant for clarification before you submit or omit anything.

Before you put in an expense claim, think about; ‘wholly and exclusively’ and keeping a record of receipts.

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