EIM30275 - Exemption for amounts which would otherwise be deductible: checking systems: models

Where an employer applies a checking system that fits one of the following models, HMRC will accept that the requirements of the exemption are met.

Checking systems may vary depending on the size of the employer’s workforce and the proportion of that workforce who travel regularly in the performance of their duties. See EIM30270. Employers will need to be able to demonstrate that the system that they use checks a representative sample of their employees’ travel claims sufficiently frequently to allow them certainty that their processes are working, that they only pay claims on qualifying occasions, and that the amount that they pay reasonably reflects the costs that employees are actually incurring.

If, as part of their checking process employers identify that the agreed rate within their approval notice is not representative of the expenses employees are actually incurring, they should contact HMRC to discuss amending their approval notice to reflect the true level of expenses incurred. Failure to do so may lead to revocation (link to EIM30265) of their approval notice.

Employers should also contact HMRC if their checking process identifies a widespread or significant failure by employees to retain evidence of their spending. Failure to do so may lead to revocation of their approval notice.

These models are not prescriptive and employers may choose to put a different system in place. Alternative systems which demonstrate that payments are only made to employees which would be eligible for a deduction, and that employees are actually incurring an expense will still meet the requirements of the exemption.

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. A checking system will however still be necessary if subsistence payments are made using bespoke rates or industry-wide scale rates.

Model A – Large employer

Large employer with more than 1,000 employees who regularly travel in the duties of their employment. Bespoke scale rate agreed with HMRC.

Employer undertakes a random 10% check of all employees’ expenses claims over a one month period on a 6-monthly basis. Claims are authorised and vouched by reference to employee diaries, work schedules and time sheets to demonstrate that employees were travelling in the performance of their duties on any days that payments were made. Employer also checks employees’ receipts to confirm that employees had in fact incurred costs and that the circumstances that applied when the bespoke scale rate was agreed have not significantly changed since the rate was agreed.

Employees should not be given prior notice before or during the period that they will be the subject of review.

The employer will have to be able to satisfy HMRC that their 10% check really is a random one - for example, every 10th name from an alphabetical list of the employees concerned. HMRC will accept the evidence produced by such an exercise as being random for the purposes of confirming that employees meet the qualifying conditions for payment of the scale rate.

If the checks indicate that the circumstances that applied when the bespoke scale rate was agreed have changed such that the approval notice is no longer valid, or it is apparent that the rate paid under the approval notice is not representative of the expenses employees are actually incurring, the employer should contact HMRC to consider revising the rate. Employers should also contact HMRC if their checking process identifies a widespread or significant failure by employees to retain evidence of their spending. Failure to do so may lead to revocation of their approval notice.

Where employees incur costs in excess of the agreed rate they are not prevented from making a claim to HMRC for relief on the excess. This will be subject to the employee being able to provide evidence in support of their claim.

Model B – Large employer

Large employer with fewer than 1,000 employees who travel regularly in the duties of their employment. Employer pays benchmark rates.

Employer checks a random 10% of all claims for one month in each 6-month period. Claims to be independently checked and authorised, and vouched by reference to employee diaries, work schedules and time sheets to confirm that employees were travelling in the performance of their duties on the date of the claim. Employer also checks employees’ receipts to demonstrate that employees had in fact incurred costs whilst travelling. Employees should be aware that any payments or reimbursements of expenses will be subject to review and that they will need to retain receipts etc.

The employer will have to be able to satisfy HMRC that their 10% check really is a random one - for example, every 10th claim received. HMRC will accept the evidence produced by such an exercise as being random for the purposes of confirming that employees meet the qualifying conditions for payment of the scale rate.

If the employer’s checks indicate that payments are made on occasions when employees do not meet the qualifying conditions, or their checking process identifies a widespread or significant failure by employees to retain evidence of their spending, the employer should contact HMRC to discuss improvements to their checking or increasing employees awareness of the need to retain evidence of their spending. Failure to do so may lead HMRC to consider compliance action to recover tax and NIC in respect of the payments made.

Where employees incur costs in excess of the benchmark rate they are not prevented from making a claim to HMRC for relief on the excess. This will be subject to the employee being able to provide evidence in support of their claim.

Model C – Small employer

Small employer with fewer than 100 employees who regularly travel in the duties of their employment. Employer pays benchmark rates.

Employer checks a random 10% of all claims. Checks to be independently checked and authorised, and vouched by reference to employee diaries, work schedules and time sheets to confirm that employees were travelling in the performance of their duties on the date of the claim, and receipts to demonstrate that employees had in fact incurred costs whilst travelling. Employees should be aware that they might be subject to review at any time, and not be given notice that any particular claim will be subject to review.

The employer will have to be able to satisfy HMRC that their 10% check really is a random one - for example, every 10th claim received. HMRC will accept the evidence produced by such an exercise as being random for the purposes of confirming that employees meet the qualifying conditions for payment of the scale rate.

If the employer’s checks indicate that payments are made on occasions when employees do not meet the qualifying conditions, or their checking process identifies a widespread or significant failure by employees to retain evidence of their spending, the employer should contact HMRC to discuss improvements to their checking or increasing employees awareness of the need to retain evidence of their spending. Failure to do so may lead HMRC to consider compliance action to recover tax and NIC in respect of the payments made.

Where employees incur costs in excess of the benchmark rate they are not prevented from making a claim to HMRC for relief on the excess. This will be subject to the employee being able to provide evidence in support of their claim.

Employees required to retain receipts for a period of 12 months from the date of expenditure.

Model D – One-man company

Single employee of a one-man company working at a series of temporary workplaces. Claiming benchmark scale rates.

Employee maintains a diary and time sheet to confirm occasions when travelling in the performance of their duties and retains receipts in respect of subsistence costs. An independent third party performs regular monthly checks on a sample of the employees’ records to confirm that the relevant conditions for the exemption were met on each occasion. Checks are performed at random and the employee does not know in advance which journeys will be checked.

If the employer’s checks indicate that payments are made on occasions when employees do not meet the qualifying conditions, or their checking process identifies a widespread or significant failure by employees to retain evidence of their spending, the employer should contact HMRC to discuss improvements to their checking or increasing employees awareness of the need to retain evidence of their spending. Failure to do so may lead HMRC to consider compliance action to recover tax and NIC in respect of the payments made.

Where the employee incurs costs in excess of the benchmark rate they are not prevented from making a claim to HMRC for relief on the excess. This will be subject to the employee being able to provide evidence in support of their claim.