Historically, there have been two ways for employees to get reimbursed for business expenses incurred personally;
- Employers can choose to directly reimburse expenses incurred by an employee.
- Or, if not reimbursed directly, the employee can claim income tax relief for allowable expenses from HMRC. These employees can claim this tax relief through PAYE, if the amount claimed is up to £2,500.
Recently, HMRC say they have identified a growing tax risk driven by ineligible claims for employment expenses. In particular, High Volume Agents 'HVAs' have been exploiting a relaxing of rules during Covid lockdown periods to process spurious and illegal claims.
HMRC say; "We want to make sure that customers get the tax relief they are entitled to in as straightforward a way as possible. However, we also need to make sure that we identify where customers are not eligible and prevent them receiving payments they are not entitled to."
As a result they are implementing new evidence requirements for claimants, to respond to the tax risk from ineligible employment expense claims.
HMRC's new approach
On 10 June, they suspended processing some claims for tax relief on employment expenses while they considered the best way to manage this risk.
In response, they have decided that they will be changing the PAYE employment expense process for taxpayers.
From 14 October 2024, they will require taxpayers who want to claim PAYE employment expenses to use a P87 form and provide supporting evidence to prove their eligibility before they progress the claim. More information on the types of evidence required is outlined under ‘evidence requirements’ below.
Their new approach is built on stopping the ineligible payments going out in the first place through increased checks and changes to processes. This includes; educating taxpayers on the consequences of ineligible claims and disrupting the business model of firms that submit non-compliant claims, according to HMRC.
HMRC are currently writing to claimants (including agents), whose claims have not been processed since the 10 June, to inform them of this new requirement and to ask them to provide evidence to support their claim.
When taxpayers send them evidence for P87 work expense claims, HMRC will check all evidence and confirm to customers whether they are entitled to tax relief.
Submitting PAYE expense claims
From 10 June, taxpayers will no longer be able to submit a PAYE employment expense claim using the digital form or make a new claim over the phone. However, taxpayers will continue to be able to use GOV.UK to check they’re eligible to claim employment expenses and to find the P87 form.
In theory, taxpayers making genuine claims will be able to provide this information and submit it to HMRC, alongside the printed P87 form, in the post. Tax agents already regularly submit P87 claims via the post, so this is not a big change for agents. HMRC omit to mention their dire response times to paperwork sent via post.
Recognising that an online claim route is more convenient for taxpayers, HMRC claim that "we are working at pace to reinstate the digital process as soon as possible. For ‘uniform, work clothing and tool’ expenses, customers will be able to claim these online from 31 October 2024. For all other expenses, we expect a digital claim route to be available by April 2025."
HMRC say they will keep this updated process under review and will provide a further update in the future.
Evidence Requirements
Taxpayers must tell HMRC which employment they incurred the expense for, as well as whether their employer reimbursed any of the cost, and if they did, show evidence of how much.
They must also have paid tax in the year that they spent money on the expense that they’re claiming. How much they can claim depends on the rate that they pay tax.
For example, if they spent £60 and pay tax at a rate of 20%, the tax relief they can claim is £12.
Examples of some of the types of evidence claimants need to provide
- Subscriptions to professional bodies
- Copies of receipts, or other evidence, that shows how much was paid for each professional subscription claimed.
- Mileage allowance.
- A copy of a mileage log for each employment. This should include the reason for every journey and the postcodes for the start and finishing points.
- Hotel and meal expenses (subsistence).
- Copies of receipts that include the date of a stay or a meal, and the name of the hotel or restaurant.
- Expenses for working from home.
- Evidence that the claimant must work from home, such as a copy of their employment contract. If it’s not stated in the employment contract, they need something else that explicitly states the employee must work from home. If it’s the claimant’s choice to work from home, they can’t claim this expense.
Other Expenses:
- A full list of the other expenses that they’ve claimed and the employments they’re for. They also need copies of receipts or other evidence that show the name of the item and that the claimant paid for it.
-
Uniform, work clothing and tool expenses (also known as Flat Rate Expenses):
They will not require evidence for these Flat Rate Expenses (FRE) claims. However, taxpayers are still responsible for making sure they are eligible to claim FRE. HMRC will still carry out risk profiling to identify customers who may not be eligible to claim FRE. From 31 October 2024, customers claiming these FRE expenses will be able to use their digital claim route. All other types of expenses which require evidence will need to be submitted to HMRC using the post.
Where to send evidence
HMRC will be asking claimants to send evidence to:
Pay As You Earn and Self Assessment
HM Revenue and Customs
BX9 1AS
Other Systems Updates
As well as requesting evidence for employment expenses, HMRC have already implemented other changes to reduce the likelihood of people making mistakes and to make it more difficult for people to try and abuse the tax system.
For example, changes were made to the R40 form in December 2023 to require evidence of a PPI claim before progressing a claim for tax repayment.
They have also begun compliance projects looking at employment expenses submitted via Self Assessment (SA) returns. In these projects they will carry out checks on the eligibility of claims, asking for further evidence. Please note that the process for submitting SA employment expenses remains unchanged.
HMRC are trying to raise awareness of these changes via their Don’t Get Caught Out campaign which reminds taxpayers to check they are eligible before claiming relief on work expenses and raises awareness of the risks of submitting ineligible tax refund claims when using some repayment agents.
HMRC uses a range of civil and criminal powers to tackle dishonest tax agents that cause harm to the tax system. For example, they recently took action against Research and Development tax firms, where they arrested 11 individuals (including some agents) on suspicion of cheating the public revenue and money laundering offences.
Conclusion
This is a big change in HMRC's approach and creates a significant additional layer of administration to successfully submit and process an expenses claim. It would certainly appear that direct reimbursement from your employer is a much simpler and more direct route where possible.
Once again a proliferation of fraudulent 'agents' preying on ill-informed taxpayers have finally forced HMRC into action. As with R&D though, their tendency is to swing from light-touch with significant fraud to taking a sledgehammer to a nut and preventing many honest taxpayers from being able to process genuine claims.
Whilst we applaud HMRC for finally taking action we have to ask, 'what took you so long?!'
The lesson for taxpayers is to use genuine, local, approachable, accountancy firms such as Visionary Accountants who are members of Chartered Accountancy bodies and properly regulated. HVAs who advertise on Facebook offering quick and easy money may seem too good to be true because they are!