Claiming Employee Expenses and Benefits for Corporation Tax

Introduction

When you provide expenses, benefits, or perks to your employees—such as bonuses, company cars, accommodation, or reimbursements for business costs—these have Corporation Tax implications for your company. Understanding what you can claim as a business expense, what needs to be reported to HMRC, and what National Insurance you need to pay will help you manage these costs correctly and avoid unexpected tax bills.

Cash Bonuses and Bonus Payments

When you pay cash bonuses to employees, including vouchers that can be exchanged for cash, these count as earnings. You must add the bonus amount to your employee's other earnings and deduct Pay As You Earn (PAYE) tax and Class 1 National Insurance through your payroll. This happens in the normal payroll cycle—you don't need separate reporting.

For non-cash bonuses, different rules apply depending on what you give. You need to follow the specific reporting and payment rules for that particular item. In some cases, you'll still need to use PAYE for non-cash bonuses, particularly if you give your employee something they can easily convert to cash (known as a 'readily convertible asset').

From a Corporation Tax perspective, both cash and non-cash bonuses are allowable business expenses, provided they're wholly and exclusively for business purposes.

Business Expenses and Cash Payments

You can reimburse employees for business expenses without triggering tax charges, but the expense must genuinely be needed for them to do their job. HMRC has specific criteria that must be met for something to qualify as a business expense.

When you provide cash sums or reimburse employees for qualifying business expenses, you must report these on form P11D, but you don't need to deduct or pay any tax or National Insurance. However, some business expenses are covered by exemptions, meaning you won't need to include them in your end-of-year reports at all.

Private expenses—anything that doesn't count as a business expense, such as travel that isn't necessary for the employee's job—count as earnings. If you cover private expenses, you must add the amount to your employee's other earnings and deduct PAYE tax and Class 1 National Insurance through payroll.

Scale Rate Payments and Round Sum Allowances

Scale rate payments are set amounts of cash you provide to employees for common business expenses like travel and meals. You can either agree a scale rate with HMRC by providing evidence of typical expenses, or use HMRC's benchmark scale rates for subsistence costs. HMRC also provides benchmark rates for employees travelling outside the UK.

As long as your employee has actually spent the scale rate payment on business expenses, you don't need to check every receipt—checking a sample is acceptable. You must report scale rate payments on form P11D unless they're exempt or no more than the agreed or benchmarked scale rate. You don't need to deduct or pay any tax or National Insurance.

Round sum allowances are different. These are set amounts you give to employees regardless of how they spend the money. Round sum allowances count as earnings, so you must:

• Add the full amount to the employee's other earnings when deducting and paying PAYE tax through payroll
• Add the amount minus any specific business expenses covered by it to the employee's other earnings when deducting and paying Class 1 National Insurance through payroll

Company Cars

Company cars provided to employees create both reporting obligations and potential tax charges. You'll usually need to report company cars used for private journeys and fuel for private journeys.

Several exemptions exist where you don't have to report or pay anything:

• Cars available for business journeys only (provided you've told employees not to use the vehicle for private journeys and check they don't)
• Privately owned cars
• Cars adapted for an employee with a disability, if the only private use is for journeys between home and work or travel to work-related training
• Pool cars that are shared by employees for business purposes and normally kept on your premises
• Fully electric cars that you own or hire—you don't have to pay or report on charging them

If you provide cars for private use and they're not exempt, you must report them to HMRC separately during the tax year and also report on form P11D at the end of the tax year. You'll pay Class 1A National Insurance on the value of the car benefit.

For fuel provided for private use, if your employee doesn't pay you back during the tax year, you must report on form P11D and pay Class 1A National Insurance on the value of the fuel benefit. If employees buy the fuel themselves or pay you back during the tax year (with payment equal to or more than what you paid), you don't have to report or pay anything.

You must keep records of the car's list price, as you'll need this to work out the value of the benefit. You can use HMRC's online tools or your payroll software to calculate the value, or work it out manually using the P11D working sheet 2.

Salary sacrifice arrangements: If the cost of cars and fuel is less than the amount of salary given up, you must report the salary amount instead. These rules don't apply to arrangements made before 6 April 2017.

Accommodation

As an employer providing accommodation, you have tax, National Insurance, and reporting obligations. The rules cover not just the accommodation itself but also Council Tax, water and sewerage charges, heating, lighting, cleaning, repair, maintenance, decoration, furniture for daily use, and staff for upkeep like gardeners and cleaners.

Several types of accommodation are exempt, meaning you don't have to report or pay anything to HMRC:

• Accommodation necessary for the employee to do their work properly (such as agricultural workers living on farms) or where an employer is usually expected to provide accommodation for that type of work (such as a manager living above a pub)
• Accommodation needed for security because there's a special threat to the employee
• Accommodation provided by a local council on the same terms as housing to non-employees
• Domestic or personal accommodation if you're a sole trader providing it for a close relative

For company directors, accommodation is only exempt if they're either full-time or work for a non-profit or charity and hold less than 5% of the shares.

If the accommodation isn't exempt, you must report on form P11D and pay Class 1A National Insurance on the value of the benefit. You can get tax relief if you provide accommodation for an employee at their temporary workplace for up to 24 months, though you'll still need to report it.

For Council Tax, water, and sewerage charges, the reporting depends on who pays initially. If your employee covers the cost and you reimburse them, add the amount to their earnings and deduct Class 1 National Insurance and PAYE tax through payroll. If you cover the costs directly, report on form P11D and deduct and pay Class 1 National Insurance (but not PAYE tax) through payroll.

For furniture, heating, lighting, and maintenance costs, different rules apply depending on who arranges contracts and pays. Generally, you'll either need to report on form P11D and pay Class 1A National Insurance, or add amounts to earnings and deduct Class 1 National Insurance through payroll.

Working Out the Value of Accommodation

To work out the value of living accommodation, use the greater of the 'annual value' or the rent you pay. The annual value depends on where the property is:

• England and Wales: 1973 gross rating value
• Northern Ireland: 1976 gross rating value
• Scotland: 1985 gross rating value divided by 2.7
• Outside the UK: Annual rental value on the open market

If you provide accommodation for only part of the year, use that proportion. Deduct any rent you receive from your employee. If the accommodation is shared or only partly used for business, use that proportion.

For properties over £75,000, you must add an additional charge to the standard value. Calculate the cost of the accommodation by adding anything spent on improvements to the original buying price, then deducting any employee reimbursements. If you held an interest in the property six years before your employee occupied it and they first occupied it after March 1983, use the property value when your employee moved in rather than the original buying price.

To calculate the additional charge: deduct £75,000 from the cost of the accommodation, multiply what's left by the official rate of interest (using the appropriate proportion if accommodation is provided for part of the year only), then deduct any rent received from the employee.

Salary sacrifice arrangements: If the cost of accommodation is less than the amount of salary given up, report the salary amount instead. Calculate the cost of accommodation normally but don't deduct any rent or payment from the employee. These rules don't apply to arrangements made before 6 April 2017.

Corporation Tax Treatment

From a Corporation Tax perspective, all the employee expenses, benefits, and perks discussed in this article are generally allowable deductions when calculating your company's taxable profits, provided they're incurred wholly and exclusively for the purposes of your trade. This means the cost of bonuses, company cars, accommodation, and reimbursed expenses reduces your Corporation Tax bill.

However, you must ensure proper reporting and payment of PAYE tax and National Insurance as described above. The employer's National Insurance contributions you pay are also allowable for Corporation Tax purposes.

Sources

• Expenses and benefits: accommodation
• Expenses and benefits: bonuses
• Expenses and benefits: cash sum payments to employees
• Expenses and benefits: company cars and fuel

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.