Employees often seem to think they cannot get a tax deduction for their expenses. In fact, they may be able to claim tax relief if they pay for travel or spend their own money on things they have to buy for work.
Lots of clients fail to claim tax relief for their legitimate expenses and I expect a fair number of advisers do too. So it makes sense to understand the basic rules about employees’ allowable expenses.
That said, HM Revenue & Customs sets a high bar for employee expenses – certainly compared with the less restrictive rules for the self-employed. Even the HMRC practice manual says: “The general rule for employees’ expenses is very restrictive.”
The basic principle is employees’ and directors’ expenses must be wholly and exclusively incurred in the performance of their duties.
This means employees can only claim relief for things they use solely for work, not in their private life. For example, they cannot claim for ordinary clothing. Nor can they claim for the cost of things if their employer has provided an alternative. It is also necessary to keep records of the expenses and claim within four years of the end of the tax year in which the money was spent.
Employees and directors should expect HMRC inspectors to be fundamentally sceptical about such claims. In particular, they may want to know why expenditure was necessary in the performance of the duties if the employer decided not to pay for it. Obviously, it is also not possible to claim for something the employer did pay for.
How to claim
The way to claim tax relief on expenses and how they are given will depend on the amount. If the amount of the expenses is £2,500 or less, any employee who already completes a self-assessment tax return should use that. Otherwise, they should print off form P87 from the HMRC website, fill it in and send it off.
It is also possible to claim by phone if the claimant had a successful claim in a previous year and their expenses are less than £1,000 (or £2,500 for professional fees and subscriptions). HMRC will then usually make any adjustments needed through the claimant’s tax code for the current tax year. If the expenses for the year come to more than £2,500, the only way to claim is via a self-assessment tax return.
What can be claimed
It may be possible to claim for repairing or replacing small tools employees need for their job (for example, an electric drill) and for cleaning, repairing or replacing specialist clothing.
It is not possible to claim relief on the initial cost of buying small tools or clothing for work. If it is necessary to buy other equipment to use in the employee’s job, they may be able to claim capital allowances instead but not, for example, on a car.
Employees often incur travelling expenses and can claim a deduction for the costs. The costs of travelling to a from a workplace cannot be claimed, unless it is a temporary place of work. Those who use their own vehicle for work may be able to claim mileage allowance relief, currently 45p a mile for the first 10,000 business miles and 25p a mile above that. If an employer does not pay employees this full mileage allowance, they can claim the difference. Record keeping of dates of trips and mileage is essential.
Employees who do have to travel for work may be able to claim tax relief on subsistence. This includes hotel accommodation where it is necessary to stay overnight, food and drink, public transport costs, congestion charges and tolls, and parking fees.
The subscriptions to some approved professional organisations can usually be reclaimed too. However, HMRC must have specifically approved the organisations. Deductions are not available for lifetime membership subscriptions.
More and more employees are required to work from home on a regular basis and may therefore be able to get tax back for some of the bills they have to pay. These expenses can only be for things to do with work, though: for example, business telephone calls or the extra cost of gas and electricity for their work area.
Employees cannot claim for things used for both private and business, such as access to broadband. It is not necessary to provide records for claims of up
to £4 a week but HMRC will want to see evidence of expenses for claims over that amount.
The position is different for those employees who agree to work at home on a voluntary basis. HMRC calls this a “homeworking arrangement” for which the employer can contribute towards the employee’s expenses but does not have to.
The point is that employees cannot claim for the home-based expenses unless the employer pays them; in which case, the employer contributions are normally free of tax and National Insurance contributions.
If the employer is not prepared to pay all these costs, it is obviously better for the employee to be required to work from home. They can then get some tax relief.
Danby Bloch is chairman at Helm Godfrey