Introduction to this document

Tax deduction from earnings claim

The general tax and NI exemption for job expenses might not apply if the expense is met directly by the employer. If you wrongly miss expenses off Forms P11D it can land you in trouble with HMRC. What should you be reporting?

Job expenses

An employee’s job expenses are only exempt from PAYE tax and NI if you’re sure that they would be entitled to a tax deduction for them had you not paid/reimbursed them. The position is even trickier if goods or services you buy for your business are also used by employees for work or private purposes.

 

Example 1 - tax exempt. Acom Ltd reimburses an employee the cost of a hotel room he paid for so that he could stay overnight while attending a two-day trade exhibition. The amount reimbursed is exempt because the rules say that if you had not reimbursed it the employee could have claimed a tax deduction against his salary for the cost of the hotel. Acom is neither required to account for PAYE tax and NI nor report the reimbursement on Form P11D.

 

Example 2 - not tax exempt. Bcom Ltd pays an annual sum of £12,000 for unlimited use of a hotel room for visiting clients, employees, etc. Because the room can be used by employees and non-employees, this counts as a mixed-use expense and so Bcom must report the value of each employee’s use on Forms P11D. This begs two questions: how much must it report on the P11Ds (section N), and must it pay Class 1A NI?

Reporting

The rules say that the amount that must be declared on Form P11D is the “proper proportion” of the cost relating to the employee’s use. If in our second example the hotel room is used by Bcom’s clients, employees, etc. for 180 nights, including 24 nights by the employee in question, should the amount on the P11D be £1,600 (£12,000/180 x 24)? Or, because the amount paid by Bcom is for annual use of the room, £789 (£12,000/365 x 24)? The prevailing view is that the proper proportion is £789.

 

In order to prevent employees being taxed on the figure, use our Tax Deduction from Earnings Claim.

Time limit

The claim must be made within four years of the end of the tax year the expense was paid in.