Expenses exemption and PAYE Settlement Agreements (490: Chapter 10)
Find out about exemptions for paid or reimbursed expenses, and what PAYE Settlement Agreements are.
Exemption for paid or reimbursed expenses
10.1
From 6 April 2016 an exemption for paid or reimbursed expenses replaces dispensations. Where an expense is paid or reimbursed which would be fully deductible there is no need for an employer to report expenses and benefits on which no tax is ultimately payable.
10.2
Where the exemption is in force, it applies both for tax and National Insurance purposes. It means that the employer does not have to:
- report to us expenses and benefits that the exemption covers
- give employees details of the expenses and benefits they receive which the exemption covers (although it may reduce queries if the employer tells employees about the exemptions which apply to them)
- include, for Class 1 National Insurance contributions purposes, the expenses payments in the employees’ gross pay
- pay Class 1A National Insurance contributions on any benefits covered by the exemption
If employers are in doubt at any time, they should ask HMRC for advice. The exemption for paid or reimbursed expenses does not apply to expenses that are paid or reimbursed under a relevant salary sacrifice scheme.
What the exemption can cover
10.6
The exemption can cover any travel expenses and benefits for which there is a matching tax deduction.
The employer has to be satisfied that travel expenses and benefits covered by the exemption are calculated and paid on the basis that they’re clearly intended to do no more than reimburse employees for expenses actually incurred in making genuine business journeys.
10.7
The sort of items which the exemption can cover are:
- air and rail tickets provided for business travel
- payments for subsistence while on business travel
- hotel bills paid directly by the employer
10.8
The exemption does not apply to fuel, a company car or business mileage payments for travel in employees’ own vehicles.
10.9
Employers wanting to pay or reimburse employee expenses with a ‘scale rate’ payment using the Income Tax (Approved Expenses) Regulations – previously the benchmark scale rates – will need to have a checking system in place to make sure that payments are only made on occasions where the employee would be entitled to a deduction, incurred an amount in respect of expenses on that occasion, and retained evidence of the expenditure.
From 6 April 2019 employers will no longer need to operate a system for checking an employee’s expenditure in order to make payments free of tax in relation to expenses paid or reimbursed using benchmark scale rates.
Instead, employers will only need to make sure that employees are undertaking qualifying travel on occasions in respect of which a payment is made or reimbursed and that neither the employer nor any other person knows or suspects, or could reasonably be expected to know or suspect, that travel was not undertaken.
Employers wanting to use a bespoke rate can apply to HMRC for an approval notice. They’ll need to undertake a sampling exercise to help determine the rate to apply, and will also need to have a checking system in place.
Approval notices will apply for up to 5 years, but may be subject to review from time to time. HMRC can revoke an approval notice if they consider that the employer has not met the conditions of that notice or has been negligent in its operation.
If HMRC revoke an approval notice the employer will need once again to report these expenses on forms P11D after the end of the tax year or on a Full Payment Submission (FPS) if registered to payroll benefits and expenses.
Read more information about expenses and benefits for employers.
PAYE Settlement Agreements (PSAs)
10.10
Under the terms of a PSA an employer can agree with HMRC each year to settle in a single annual payment the Income Tax liability on certain expenses and benefits provided to its employees and the National Insurance contributions liability that arises on both the benefit and the tax.
Employers do not have to report payments which the PSA covers on form P11D or payroll them if the employer has registered to payroll benefits. Nor does the employer have to give details to the employee (although it may reduce queries if the employer tells employees about items which apply to them).
10.11
To be included in a PSA, expenses and benefits have to be of a minor or irregular nature or items where it’s impracticable to operate PAYE on or determine a value for the P11D or FPS. So expenses of regular business travel would not generally be within the scope of a PSA, unless for relatively small amounts or where the benefit is difficult to attribute to individual employees (for example, shared cars and taxi journeys).
A round sum allowance for business travel is also outside the scope of a PSA. But a PSA can be used to cover expenses payments made to employees who make occasional business journeys, even if the amounts involved are substantial.
10.12
Read more information about PSAs.