It’s hard to deny that the reclaiming of expenses has become a hot topic over recent weeks. Of course expenses has always been a hot topic because it has always been seen as a way of providing a perk to staff as a means of retaining and motivating them without incurring tax.
During the 1970’s when income tax rates reached a staggering 85% top rate, wealthy individuals and companies used every loophole they could find to avoid paying tax on as much income as they could. They did this by permitting excesses in “business” expenses as a means of retaining, rewarding and motivating staff. Imagine receiving a bonus only to find that 85% was paid in income tax. In response, the government introduced the concept of benefits in kind as a form of taxable income and the race started to close the loopholes while companies found new ones to exploit. In essence this was a King Canute scenario where the government fought a losing battle. It was not until the income tax rates fell to 40% that companies and their employees considered it “fair” to be taxed and stopped trying to find new loopholes. For many tax payers this is a distant memory. The hangover is that highly paid employees, for the purposes of “benefits in kind”, are those earning £8,500??
As it stands today, HM Revenue & Customs continue to identify new ways to tax expenses claimed by employees from companies on expenditure that it claims is not essential to running the business. Furthermore these taxable expenses now attract National Insurance for the company as well. Colin Mills, Founder and CEO of The FD Centre, who are the leading provider of experienced Finance Directors to mid-sized businesses on a part time basis, comments – “In one of our clients, HMRC was claiming that a monthly meeting between members of staff at a nearby Pizza restaurant, away from the phones when the restaurant was empty, was taxable, when the hire of a meeting room at double the cost of the meal would have been allowed.” In a famous tax case it was found that a business that pays for the cost of an employee’s home is only not taxable when it is “wholly exclusively and necessarily for the purpose of the business”. This only occurs in very exceptional circumstances, eg. a lighthouse keeper. However, the rules are different for politicians who are allowed to have 2 homes and can claim all manner of refurbishment and fixtures as allowable expenses on their second home without the slightest regard as to whether they are “wholly exclusively or necessarily for the business of being a politician”. It is for this reason that companies and their employees up and down the country are so angry at the double standards set by politicians in the expenses scandals.
While this may appear abhorrent for us all, there are some reminders about expenses policy that should be reviewed:-
- Businesses need to have a clear written policy with all employees on all types of expenses that can be reclaimed by their staff. These policies have to be enforced rigorously and consistently across all staff without exception. One area that always needs particular focus is “entertaining”.
- Company credit cards are always a recipe for disaster as claims always lag well behind the event leaving excesses and abuses undetected for long periods.
- A systematic practice of abusing expenses always starts at the top of the business. Once it becomes common knowledge that the boss is abusing expenses, employees rapidly drop into a similar pattern.
- Almost all expenses need to have an accompanying receipt for the expense not to be taxable.
- Some businesses allow expense abuses as a means of rewarding staff – this is very troublesome as you cannot say “you performed well on this job, treat yourself to a tax free bonus by claiming a holiday on the company and calling it a business trip.” Where a car allowance is given as a reward, the impact is exactly the same as an increase in salary or the payment of a bonus. At least everyone can see that good performance has been rewarded which aids motivation.
- Income Tax is not the only issue with expenses. The VAT inspectors love nothing more than trawling through expenses looking for claims without receipts that they can disallow.
With the prospect of higher rate taxes and the government’s need to fill the gap created by the bank sector bailout, there will be more stealth taxes on expenses. As many businesses desperately try to cut costs, there will be more home working, use of private cars for business purposes, renting houses for staff sharing while at work rather than paying for long term hotels, to name but a few. I fear that all of these will be targeted by tax inspectors as benefits in kind when they are meant to be cost savings by businesses. For business owners, read the rules on www.hmrc.gov.uk and document your reasoning behind these and agree them with the employee in writing to evidence the cost saving and rules for claims.
Business Development Director
The FD Centre