EIM30220 - Exemption for amounts which would otherwise be deductible: conditions
S289A ITEPA 2003
For periods prior to 6 April 2016, see EIM30050.
Expenses paid or reimbursed and benefits provided, which would be fully deductible from an employee’s earnings from that employment are exempt from charge to income tax or NICs from 6 April 2016 provided the payment or reimbursement is not part of a relevant salary sacrifice arrangement (see EIM30230).
For mixed expense payments or reimbursements, where the allowable expense amount is clearly identifiable, the exemption will apply to this amount and only the additional non-exempt amount will need to be put through the employer’s payroll.
Scale rate payments
Where expenses are paid or reimbursed using a scale rate payment, either in accordance with The Income Tax (Approved Expenses) Regulations 2015 (see EIM30240), or at a bespoke rate agreed under an approval notice (see EIM30260), and are not provided through a relevant salary sacrifice arrangement, the exemption will only apply if conditions A and B are met.
Condition A is that the payer, or another person, operates a checking system for checking that the employees are in fact incurring and paying amounts in respect of expenses of the same kind and that a fully matching deduction would be allowed under Chapters 2 or 5 of Part 5 ITEPA in respect of those amounts.
Condition B is that neither the payer nor any other person operating the checking system knows or suspects, or could reasonably be expected to know or suspect that the employee had not incurred an amount in respect of the expense, or that a deduction under Chapters 2 or 5 of Part 5 ITEPA would not be allowed in respect of those amounts.
Approved way
A scale rate expense is paid in an approved way if it is either calculated and paid or reimbursed in accordance with the regulations on benchmark rates (see EIM30240), or it is calculated and paid or reimbursed at a bespoke rate in accordance with an approval notice given under section 289B ITEPA 2003 (see EIM30260).
Salary sacrifice arrangements
It is a condition of the exemption that expenses or benefits are not paid or reimbursed under a relevant salary sacrifice arrangement. See EIM30230.
Checking systems
Employers must also have a system in place for checking that payments to employees are only made on occasions where the employee would be entitled to a deduction from earnings in respect of that payment, the employee had incurred an amount in respect of expenses on that occasion and retained appropriate evidence of that expense. See EIM30270.
The introduction of legislation requiring an employer to have a checking system formalises the previous guidance at EIM30059.
Removal of checking requirement for benchmark scale rates from 6 April 2019
From 6 April 2019, employers will no longer be required 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 be required to ensure 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. See EIM30225.
Employers who pay any non-allowable expenses or provide non-exempt benefits will still need to put those through the payroll and deduct tax and NICs, or put them on form P11D in accordance with existing practice.
Benefits that are only partially exempted will need to be put through the payroll in full and employees will need to claim a deduction from HMRC on the part that is exempt.