Tax relief for employee expenses

18 April 2017

As announced in the Spring Budget, on 20 March HM Treasury published a ‘call for evidence’ on the taxation of employees’ expenses. This begs the question: Is HMRC going to move forward with reforms of tax relief for employee expenses to reflect modern work practices?

Background

The reason for the call for evidence is that the government wishes to better understand the use of the income tax relief available for employees’ business expenses, including those expenses not reimbursed by the employer. According to the Treasury, the tax relief that employers do not reimburse and which employees then claim from HMRC costs the Exchequer £800m per year and there has been a 25 per cent increase in such claims in the last five years. The government has stated that it has no plans to remove the relief, but wants to better understand how it operates in practice. Three key objectives are:

  • to re-establish some general principles in line with current employment practices and government policies;
  • to ensure the tax rules are fit for purpose in the modern economy; and
  • to understand the reasons for the increase in claims.

As a small aside to this, HMRC is also concerned by the number of agents acting on an employees behalf that submit claims for tax relief and charge a commission for providing the service. Our view is that this is probably due to the complexity of the tax rules as opposed to anything else, but it will be interesting to see the findings on this issue.

The case for modernisation

It is to be hoped that the call for evidence will be a first step towards the government modernising the rules in relation to the taxation of expenses. The current rules requiring expenses to be incurred ‘wholly, exclusively and necessarily in the performance of the duties’ stem from legislation which was introduced in 1853 and at that time included the expense of ‘keeping and maintaining of a horse for work purposes’.

The significant advances in technology used by employees as part of their duties, along with vastly different work practices, mean that we are overdue a radical overhaul of these rules. A typical example that illustrates the point is in relation to mobile phones, where a corporate mobile phone can be provided and, irrespective of whether the employee uses it solely for private purposes, there is no tax charge. This contrasts with the situation where the employee uses their personal mobile for business purposes and, because of the all-inclusive nature of mobile packages today which include calls, texts and data, they cannot accurately identify the actual business element. In such cases, they will likely be taxed on any reimbursement they receive from the employer designed to cover the business usage.

Your views

HM Treasury has set out 17 questions which it hopes will give an insight into current practices. The questions can be viewed here and we would encourage any employers who have strong views on any of the questions to submit responses.

If you have any questions in connection with this call for evidence, please get in touch with Graham Farquhar or your usual RSM contact.