Sarah Bradford outlines when employees may be able to claim tax relief for expenses.
----------------------
This is a sample article from our business tax saving newsletter - Try Business Tax Insider today.
---------------------
The rules governing the deductibility of employment expenses are notoriously strict. However, that does not mean employees who incur expenses in relation to their job cannot obtain relief; it is a question of understanding when relief is available and, if it is, how the relief can be claimed.
The rules governing deductions from earnings are found in ITEPA 2003, Pt. 5.
The general rule
The general rule governing deductions for expenses (ITEPA 2003, s 336) provides that a deduction is allowed from earnings for an expense if the employee is obliged to incur and pay it as a holder of the employment, and the amount is incurred wholly, exclusively and necessarily in the performance of the duties of the employment.
This test can be contrasted with the business expenses test, which simply requires an expense to be wholly and exclusively incurred in order that a deduction is forthcoming. The need for employment expenses to be ‘necessarily’ incurred imposes a high hurdle for employees to jump in order to secure the deduction.
HMRC guidance on the general rule can be found in the Employment Income manual at EIM31630 and following.
It should be noted that the general rule does not apply to travel expenses, which have their own set of rules.
The tests
To be successful in securing a deduction for an expense under the general rule, the following tests must be met:
-
The expense is one that each and every jobholder of that employment would have to incur.
-
The expense is necessarily incurred.
-
The expense must be incurred in the performance of the duties of the employment.
-
The expense must be incurred and paid.
-
The expense must be wholly and exclusively so incurred.
The test imposed by ITEPA 2003, s 336 is an objective one, and is only met if each and every holder of the employment would need to incur the expenses. It is the job that determines whether the expense is necessary, rather than the circumstances of the individual performing the job.
Likewise, an expense is only necessarily incurred if each and every jobholder would need to incur that expense. The fact that an expense is unavoidable does not of itself make it necessarily incurred; it will depend on whether the need to incur it arose from the personal circumstances of the jobholder or the requirements of the job.
Furthermore, the fact that an employer requires the employee to incur the expense does not mean it is deductible; however, the requirements of the employer may be relevant in determining the duties of the employment and the requirements that they impose.
This test relates to the nature of the expense, not the amount. Consequently, if this and the other tests are met, the full amount is deductible, even if a cheaper expense option is available.
A distinction is drawn between expenses incurred ‘in’ the performance of the duties and those which put the employee in a position to perform the duties of the employment. A deduction is only allowed for the former. For example, an employee may need to pay for childcare in order to go to work; however, this expense is not deductible as it is incurred to enable the employee to be able to work rather than in performing the duties of their employment.
Unsurprisingly, a deduction is only available for expenses that have actually been incurred. Further, the requirement that only those expenses wholly and exclusively incurred in the performance of the duties are deductible effectively denies relief for dual-purpose expenses. An example here is ordinary clothing, for which no relief is available even if the employee only wears the clothes for work; the clothes also provide cover and warmth.
A deduction for employment expenses can only be made from the earnings from the employment to which the expenses relate, and cannot exceed those earnings. It is not possible to create a loss that can be relieved against other income.
Travel expenses
Travel expenses have their own set of rules to determine whether a deduction is forthcoming. In the main, the tests are less restrictive than those imposed by the general rule. The legislation governing tax relief for travel expenses is found in ITEPA 2003, ss 337–342. HMRC guidance on the rules is contained in their Employment Income manual at EIM31800.
Broadly, relief is available for travel in the performance of the duties of the employment and travel to a place where the employee’s attendance is necessary in order to perform the duties of the employment.
As a general rule, relief is not available for travel between the employee’s home and the employee’s workplace (ordinary commuting) – this is travel which puts the employee in a position to perform the duties of the employment rather, than travel incurred in performing those duties. The fact that the employee’s attendance at the workplace is necessary does not render the costs of commuting deductible. There are limited exceptions to this rule, applying where the employee is working at a temporary place for a limited duration or where the employee has a travelling appointment.
Where the employee works from home, relief may be available for travel from the employee’s home to the employer’s premises if HMRC accepts that the employee’s home is a workplace. Again, this is a difficult test to pass.
Travel that is generally understood to count as `business travel’ (e.g., visiting a customer or a supplier) will normally be deductible where the cost is not met by the employer. Again, if the test is met, the actual cost will qualify for relief, even if a cheaper option is available.
Fees and subscriptions
Employees are allowed a deduction for professional membership fees meeting the conditions of ITEPA 2003, s 343 and for annual subscriptions (within ITEPA 2003, s 344) paid to bodies on HMRC’s List 3.
Claiming relief
There are various mechanisms for claiming relief and the applicable route will depend on the employee’s circumstances. HMRC has recently been waging something of a war against repayment agents who charge high fees for making a simple claim on an employee’s behalf, introducing legislation to prevent tax repayments from being assigned to a repayment agent.
Where an employee client is required to complete a self-assessment tax return, any claim for relief for employment expenses should be made in the employment pages of their tax return.
If the employee does not need to complete a return, the easiest way to make a claim is online. The online service is available on the Gov.uk website at www.gov.uk/guidance/claim-income-tax-relief-for-your-employment-expenses-p87. Before making the claim, the employee can use the tool at www.tax.service.gov.uk/claim-tax-relief-expenses to check that they are eligible to use the online service.
Claims can also be made by phone (0300 200 3300) if a claim has been made in previous years for the same expenses type and the total expenses are either less than £1,000 or, for professional fees and subscriptions, less than £2,500. This route cannot be used to claim relief for expenses incurred as a result of working from home.
The final option is to make a claim by post on form P87, which is available to download on the Gov.uk website at www.gov.uk/government/publications/claim-income-tax-relief-for-your-employment-expenses-by-post. This route must be used where a claim is made on behalf of someone else or in respect of expenses for more than five jobs.
Practical point
Check that employees are aware of when they can claim tax relief for expenses that they have incurred in relation to their job, and how to make the claim.
