Employees often mislay receipts and may not get round to submitting claims for some time. Employers may spend a considerable amount time dealing with claims and reporting payments to HMRC. Consequently, anything that streamlines the process and make life easier all round is worthy of consideration.
One option is to reimburse certain expenses by reference to scale rates rather than repaying the actual amounts incurred. This has a number of benefits. Employees will know in advance the level of reimbursement that they will receive and this may have the added benefit of controlling costs. Reimbursing by reference to scale rates also removes the need to keep receipts to support expenses claims, greatly simplifying matters.
From a tax perspective, there are various issues to be aware of. If the scale payment does no more than reimburse the expenses actually incurred, HMRC do not regard it as a round sum allowance. This is important as it means the employer does not have to operate PAYE when the payment is made to the employee. However, before this approach can be adopted, HMRC need to be satisfied that the rates used are not excessive. This means that it is necessary either to obtain HMRC’s consent or to use benchmark rates published by HMRC, where these are appropriate.
The fact that the employer does not need to operate PAYE does not mean that tax and National Insurance can be forgotten. In the absence of a dispensation, the employer will need to return the expense payments made to HMRC on form P11D or P9D, as appropriate. The employee will then need to claim an associated deduction if the expenses are incurred wholly, necessarily or exclusively in the performance of the duties.
In the event that the expenses covered by the scale rate are fully deductible, it makes sense to seek a dispensation. This will allow the scale rate payments to be ignored for tax purposes. The employer will not need to report them on the P11D or P9D and the employee will not need to make an associated claim for relief.
However, before granting a dispensation, HMRC need to be satisfied that the scale rates are set at a rate that broadly represents the employees’ actual spending. Where possible, employers should submit receipts and other evidence in support of the rates.
Where the claim relates to subsistence expenses, it may not be practicable for the employer to obtain evidence of actual spending from all employees in support of the claim. In this scenario, HMRC will accept claims based on a sample, provided that the sampling exercise adheres to certain conditions. The sample must be a random sample based on ten per cent of eligible employees for one month (Employment Income Manual EIM05210).
Once the sample has been selected, only the chosen employees need keep expense records and receipts. Further, they only need to do this for the month for which the sampling exercise is being carried out. However, HMRC need to be convinced that the sample is truly random and not contrived to support higher scale rate payments. Samples based on, say, every tenth employee from an alphabetical list, would be regarded as acceptable.