Employer compliance for travel expenses (490: Chapter 11)
What systems and processes employers are expected to follow to pay travel expenses to their employees.
General
11.1
Employers are expected to operate systems which allows them to identify the travel expenses they pay to or for their employees.
Employers who have paid travel expenses to their employees under the terms of the exemption for paid or reimbursed expenses must be able to show that they have treated those payments correctly.
Where they cannot do so we will normally ask them to account for tax and National Insurance contributions. Employers must also be able to show that they have completed forms P11D (or Full Payment Submission (FPS) if they have registered to payroll) correctly.
Record keeping
11.2
Records for travel expenses and benefits relating to forms P11D or FPS if registered to payroll benefits may be kept on paper, or electronically.
They must normally be kept:
- in their original form (for example, where an employee gives the employer a receipt to back up a signed expenses form, both items must be kept even if the information is transferred onto a computer)
- for at least 3 years after the end of the tax year to which they apply, employers must make their records available to HMRC on request
Employer compliance reviews
11.3
From time to time we review employers’ records to make sure that employers have accounted for the right amount of tax and National Insurance contributions at the right time, and that they have correctly completed forms P11D or FPS if registered to payroll benefits. We may select an employer for a compliance review for a variety of reasons.
A review does not necessarily mean that an employer is thought to have treated expense payments incorrectly or made incorrect returns on forms P11D or FPS.
11.4
Our factsheets General information about compliance checks: CC/FS1a and Compliance checks: information notices - CC/FS2 tell employers how we carry out our reviews. In particular, they explain employers’ rights and promise that we’ll treat them fairly and courteously.
They also promise that we will provide help where appropriate.
11.5
During the review we will check that an employer has:
- properly deducted and accounted for tax and National Insurance contributions
- completed forms P11D and FPS correctly
- met the terms of any approval notice in place for travel expenses and benefits
- correctly worked out and accounted for the tax due under any PSA
11.6
We will want to establish some basic facts such as the:
- nature of the business
- size of the workforce
- method of recording expenses payments to employees
- systems used by the employer to ensure that tax and National Insurance contributions are accounted for, at the right time
11.7
Where we establish that the employer has operated PAYE correctly we will tell them this and advise them that the review is complete. If we think there is something wrong we will tell the employer and ask for an explanation. We will also suggest how the employer can put it right for the future.
Where tax and National Insurance contributions have been lost as a result of a mistake, we will provide a computation of the amount thought to be owing, and any interest and penalties which we will charge.
Our factsheet CC/FS6. ‘What happens when we find something wrong’ explains how we work out penalties where the employer has failed to operate PAYE correctly.
11.8
Our approach is to:
- seek a settlement with the employer in respect of tax and National Insurance contributions which should have been accounted for
- invite the employer to settle on a voluntary basis any tax recoverable from employees (other than directors) in respect of P11D items incorrectly reported
- advise the employer to send an FPS with the correct amounts of tax if they’re registered to payroll benefits and expenses
11.9
Where an employer can satisfy us that:
- they took reasonable care to operate PAYE
- any underpayment of either tax or National Insurance contributions, or both, arose as a result of an error made in good faith we may direct that we recover the underpayment from the employee
Where an employer has operated proper controls and has acted in good faith, we will not seek to recover from the employer tax and National Insurance contributions which has been lost as a result of inaccurate information provided by an employee.
Providing information to HMRC and employees
11.10
We may also charge penalties for failing to send forms P11D or failing to send an FPS (if registered to payroll benefits) to us and for failing to pass the information to employees.
Where there is such a failure, we will:
- remind the employer of the obligation
- encourage compliance
- charge penalties where the amount of tax is significant or the employer persists in failing to comply
11.11
We’ll ask the employer to explain what went wrong before we consider any penalty action.
We will not normally seek penalties from employers for errors such as the incorrect calculation of figures entered on forms P11D or an FPS provided the employer has acted in good faith and the errors are few in number.
11.12
Where the employer has made an incorrect return of expenses and benefits on form P11D because an employee has given wrong information, we will not invite the employer to settle the liabilities if it’s clear that adequate controls were in place.
We will instead seek the tax from the individual employee. But if there are a large number of employee failures we may take the view that the employer’s controls are inadequate.
Where the employer is registered to payroll benefits under PAYE, we would consider whether the action at paragraph 11.9 is appropriate.
Employers and the expenses exemption
11.13
Where we discover that reimbursed travel expenses or benefits were not covered by an exemption and did not have tax and National Insurance contributions deducted from them, or the travel expenses were not included on forms P11D or FPS where appropriate.
We’ll normally regard the employer as having failed to either correctly operate PAYE or correctly complete forms P11D, or both – with the result that we may seek tax, National Insurance contributions, interest and penalties, as appropriate, from the employer.
11.14
Where we find out that tax may be payable on items which the employer may have considered to have been covered by an approval notice, for instance if the basis on which the approval notice was applied has changed, we may revoke the approval notice by giving notice to the employer.
Where we do revoke it from the date of the notice we will not take any action against employers or employees in respect of payments made under the terms of the approval notice before that date.
11.15
From time to time employees may be found to have overstated their expense claims. To correct these errors, employers should have arrangements in place to recover from their employees any sums overpaid or, to arrange payment of tax and National Insurance contributions in respect of those overpayments.