Claiming expenses for employees
When you're an employee, you may pay for some business costs yourself. That might be travelling to a training course or buying some soap for the office bathroom.
You'd then expect your employer to pay you back for those expenses, but the employer is subject to strict rules from HMRC about when they're allowed to pay you back without anyone incurring an extra tax bill.
If the employer pays you back for something that's outside those rules, you'll end up paying more tax. To avoid this, be good and don't claim anything outside the rules!
What can your employer pay you back for without anyone incurring extra tax?
Briefly, any expenses that qualify as "business expenses" or "business travel". Business travel expenses exclude nearly all home-to-work journeys.
To see if expenses qualify as "business", here are HMRC's conditions, which must all be met for the expense to qualify:
- The expense would have been incurred whoever was doing your job.
- The expense was necessary for you to carry out your work.
- The expense was incurred "in the performance of your duties".
- The expense was incurred and paid.
- The expense was "wholly and exclusively" for your work.
So what does all that mean?
The expense would have been incurred whoever was doing your job.
HMRC look at the requirement of the job itself, rather than your requirements as an individual.
They give an example of an employee working in a chemical factory, who's provided with overalls by his employer, but decides to buy his own instead because he finds the employer's overalls uncomfortable.
Because the employer already provides regulation protective clothing, if the employer then paid the employee back for the cost of replacing and washing his overalls, the employee would pay extra tax on that payment.
The expense was necessary for you to carry out your work.
As well as being an expense that anyone who did the job would have incurred, the expense must be necessary for the work to be done.
But HMRC say quite carefully that it's the nature of the expense that would be necessary - not the amount.
As an example, Ed travels to London to meet one of our accountants. That's necessary for him to do his job, so he can claim the cost of the journey back from FreeAgent.
The journey by air costs a lot more than a coach ticket would have done, but HMRC allow the whole cost of the air fare, rather than restricting the amount Ed can claim to the cheapest available means of transport.
They're not that mean!
The expense was incurred in the performance of your duties.
This is a tough one, because it's tighter than the expense being relevant to the job or in connection" with the job.
HMRC give an example of a salesman whose company exports a lot to France, so he decides to improve his French by going to night school. The cost of his night school classes doesn't constitute a business expense.
Even though they're relevant to his job and in connection with his job, he doesn't have to speak good French in order to do his job - so out of luck there!
Books and journals are a classic one that HMRC will often jump on. If you buy a work-related book and you're just reading it to broaden your background knowledge, then you're unlikely to be able to claim tax relief on the cost of that book.
The expense was incurred and paid.
What HMRC mean here, is that if the total expenses you've incurred in a tax year exceeds your salary, then you can't create a tax loss and claim a refund.
So, if you're a company director paying yourself a salary of £6,000 a year, and your expenses amount to £8,000 but you haven't paid yourself anything back for those expenses, then your taxable income is £nil - not -£2,000.
The expense was "wholly and exclusively" for your work.
(Complicated rules apply here for travel expenses, which you can read more about using the link provided.)
For non-travel expenses, if the expenditure has a dual purpose, business and non-business, then unless you can work out part of it that was just for business, you can't claim any of it.
The classic here is ordinary clothing, sometimes worn for work.
For example, I buy a plain grey skirt to wear to the office. Because I could also wear that skirt for dinner out with my husband (never mind whether I actually would or not), I can't ask FreeAgent to pay for the cost of my skirt.
Clothing is another area where some different rules apply, though - watch this space!
So, if you're an employee, when you're thinking of putting a business cost into Expenses in FreeAgent, just make sure it's not going to bump up your tax bill!
- Remember, if you're the director of a limited company, you're an employee. If you're a sole trader or a partner, you're self-employed rather than being an employee and different rules apply to you.
Disclaimer: The content included in this guide is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this guide. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.