Exemption for Paid or Reimbursed Expenses

When you pay or reimburse business expenses to your employees, you need to understand when these payments are exempt from tax and reporting. Since April 2016, there's been a statutory exemption that covers most genuine business expenses, meaning you won't need to report them on forms P11D or deduct tax through payroll — as long as you meet certain conditions.

What is the exemption for paid or reimbursed expenses?

From 6 April 2016, HMRC abolished the old dispensation system and replaced it with an automatic exemption. This exemption applies when you pay or reimburse expenses that are necessary for your employees to do their jobs.

If you're satisfied that the expenses or benefits you provide would be fully covered by this exemption, you don't need to:

• Report them on forms P11D at the end of the tax year
• Deduct tax if you operate payrolling of benefits
• Include them in your employee's tax return

The key principle is simple: if the expense is wholly and exclusively for business purposes and the employee would be entitled to claim a tax deduction for it, the exemption applies.

What expenses are covered by the exemption?

Common items that qualify for the exemption include:

• Travel expenses — including subsistence costs (meals and accommodation) associated with business travel
• Business entertainment expenses — when entertaining clients or customers
• Credit cards used for business — when an employee uses a company credit card to make business purchases on your behalf
• Professional fees and subscriptions — relevant to the employee's work

This list is not exhaustive. The principle is that any expense incurred necessarily in the performance of an employee's duties will qualify.

Important exclusions

The exemption does not apply to:

• Salary sacrifice arrangements — expenses or benefits provided under a salary sacrifice agreement remain taxable
• Round sum allowances — fixed allowances paid regardless of actual expenditure
• Mileage Allowance Payments (MAPs) — these have their own separate tax exemption with specific rates, so the expenses exemption doesn't cover them

Using benchmark scale rates

Benchmark scale rates (previously called approved scale rates) allow you to reimburse certain expenses at standard rates without needing receipts for every claim.

From 6 April 2019, the rules for using benchmark scale rates were simplified. You now only need to:

• Make sure employees are undertaking qualifying travel on the occasions for which payment is made or reimbursed
• Ensure that neither you nor anyone else knows, suspects, or could reasonably be expected to know or suspect that the travel was not actually undertaken

You no longer need to operate a detailed checking system to verify the actual amount each employee spent on each occasion when using benchmark scale rates.

Bespoke rates and approval notices

If the standard benchmark scale rates don't suit your business, you can apply to HMRC for approval to use your own bespoke rates. To do this you'll need to:

• Undertake a sampling exercise to determine an appropriate rate
• Maintain a checking system to ensure the rate remains accurate

Approval notices last for up to 5 years but can be reviewed by HMRC at any time. HMRC can revoke an approval notice if you haven't met the conditions or have been negligent in operating the system. If your approval is revoked, you'll need to start reporting these expenses on forms P11D or through payrolling benefits.

What counts as an expense payment?

For the purposes of these rules, expenses payments include:

• Advance payments made on account of future expenses
• Reimbursements of expenses already incurred by the employee
• All types of travelling and entertaining expenses
• Allowances related to specific expenses (like subsistence allowances)
• Amounts you put at the employee's disposal that they then spend on business expenses

Credit card purchases

When an employee uses a credit card in your business's name, the expense is treated as an expense payment unless all these conditions are met:

• The card was used to make a business purchase
• The employee had your prior authority for the purchase
• When making the purchase, the employee made it clear they were acting on your business's behalf

For a purchase to be clearly on your business's behalf:

• Your employee must explain in advance that the purchase is on your behalf
• The supplier must accept that the purchase is on your behalf

What happens when the exemption applies?

When the exemption covers an expense payment:

• PAYE does not apply to the payment
• You don't need to report it on form P11D
• The employee doesn't need to include it in their tax return

This significantly reduces administrative burden for both employers and employees, allowing you to focus on running your business rather than paperwork.

Keeping proper records

Even though you don't need to report exempt expenses to HMRC, you should still maintain proper records. This includes:

• Evidence that expenses were incurred for business purposes
• Receipts or other documentation supporting the amounts paid
• Records of your checking systems if you use bespoke rates

These records will be important if HMRC ever queries your expense payments during a compliance check.

Sources

• Exemption for paid or reimbursed expenses (480: Chapter 2)
• Tax treatment of expenses payments (480: Chapter 3)

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