Your Straightforward Guide to Employee Expenses

There may times that your employees pay for business related expenses themselves, from getting the train to a client meeting to buying more milk and coffee. As an employer you may be able to reimburse those costs, but there are strict rules about what you can provide to employees without them needing to pay additional tax.

In this article we’ll go over what expenses you can pay back to employees, when they might need to pay tax, and the importance of creating an employee expense policy.

What expenses can I reimburse an employee for?

It’s up to you what payments you make to your employees, but there might be tax to pay if you cover expenses which aren’t “wholly and exclusively” related to work and a necessary part of the job.

Paying an employee for expenses outside of this might see it classed as a benefit in kind:

Your employee will pay extra tax on the value of what they receive
As an employer you’ll still be able to claim tax relief on the expense, but you’ll also need to make National Insurance contributions on it

What qualifies as a business expense for employees?

The rules around what your employees can treat as an allowable expense for work without incurring extra tax cover five broad points. If you’ve arrived here fresh from doing battle with HMRC’s tax manuals, we’ll give HMRC’s definition, and then explain what it means!

The expense must be one that each and every holder of that employment would have to incur

It doesn’t relate to a specific employee, and would have been incurred by anyone doing that job.

HMRC use the example of someone working in a chemical factory who finds the standard issue overalls uncomfortable so buys their own. In this scenario the employer already provides protective clothing, so reimbursing the employee for the cost of organising their own would be classed as a benefit in kind.

The expense must be necessarily incurred

It’s an essential expense in order for the employee to carry out their work

As long as it’s a necessary expense, you’re not restricted to using the cheapest option available. For example, a business trip which is possible by either train or by air. Either option can be claimed in full as long as the trip is needed for work – regardless of whether one option is cheaper than the other.

The expense must be incurred in the performance of the duties of the employment

It’s a direct result of your employee carrying out their job

This means it’s not just an expense which is relevant to their work, it must be a direct result of them performing that role. HMRC give the example of a journalist who buys newspapers to read. It helps them broaden their knowledge and carry out their role efficiently, but it’s not a cost incurred in order to perform those duties.

The expense must be incurred and paid

The total amount of expenses shouldn’t be more than the total earnings

HMRC say that a deduction for employees’ expenses can only take place if an actual expense has been incurred and paid. If the total amount of expenses incurred in a tax year (from 6th April to 5th April) is more than the total earnings in the same period of time, you can’t claim a tax refund on the difference.

The expense must be wholly and exclusively so incurred

It doesn’t count if the expense has a dual purpose – for both business and non-business use (although this doesn’t apply to travel expenses)

HMRC don’t allow business expenses which include personal (dual) usage, so you’ll only be able to make a claim if you can work out the part which relates to the business – otherwise you won’t be able to claim for any of it.

The most common example of this is clothing. If it’s something you can wear to work, the shops, or on the school run, then it has dual purpose so you won’t be able to claim for it. Even if it’s only ever worn for work, it still has the potential to be dual usage so it’s not an allowable expense. Although you might be able to claim expenses for branded uniforms, costumes, and protective clothing!

If your employee is entitled to a uniform or clothing expenses, they might also be able to claim tax relief for washing and maintenance costs towards it. This is usually dealt with through their tax code, so you might see a change!

Can my employee claim expenses from HMRC?

Yes, although your employees can’t claim tax relief on the same thing twice, so if you’ve already reimbursed them for something then they can’t claim for it again. Their claim depends on what they do for work. For example, if they’re required to work from home your employees may be able to claim some of the cost.

They can make their claim using a P87 form as long as they:

Pay tax through PAYE
Haven’t filled out a Self Assessment
Are owed less than £2,500

If they don’t satisfy all those criteria, they’ll need to submit a Self Assessment tax return and include the claim.

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Do I need an expenses policy for employees?

Having a policy for managing employee expenses in place will make the process easier, more consistent, and can help protect your business from fraudulent claims. Every employer hopes to be safe from this with their workforce, but it never hurts to be prepared.

What should an expenses policy include?

As a rough guide to get you started, your policy document might could include:

A summary of how your business handles employee expenses
What does and doesn’t qualify as an expense
How to go about making a claim
How long employees can expect to wait before the cash hits their account
What happens in the event of a dispute around any expense claim

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Your Straightforward Guide to Employee Expenses