Work expenses unlikely to remain stationary
In early May 2017, HM Treasury launched a consultation into the taxation of employee expenses, after a 25% increase in claims over the last five years costing the Exchequer £800m a year. Guy Smith from Abbey Tax discusses the possible changes to business expenses.
Whilst the consultation document unequivocally states the government has no plans to remove the relief on employee expenses, the start of a formal consultation usually leads to change and tinkering with the subject matter.
Many employees incur business expenses performing their job and then seek reimbursement from their employer for any costs they have paid personally, such as the cost of a train ticket to attend a training event.
However, there are a range of expenses which employees may claim direct from HMRC such as:
- Fees and subscriptions to professional bodies.
- Purchase of protective clothing.
- Laundry of uniform costs.
- Household expenses where an employee's home is a workplace.
- Business travel to a destination other than the normal, permanent workplace.
Claims for amounts up to £2,500 can be made through an individual’s Personal Tax Account or the completion of a form P87. Claims in excess of £2,500 can be made by completing a self-assessment tax return.
Although HM Treasury has not explicitly said it wants to reduce the cost of claims to the Exchequer, that is clearly one of the central drivers to be insinuated from the consultation.
Officially, the main objectives of the consultation are:
- To see if the rules on employee expenses could be clearer and simpler.
- To see whether the rules for expenses are fit for purpose in the modern economy.
- To establish why the cost to the Exchequer for expenses which are not reimbursed has increased.
What is the scope of the consultation?
The consultation is calling for evidence and comment in three particular areas:
- Current employer practices on employee expenses.
- Current tax rules on employee expenses.
- The future of employee expenses.
17 questions are asked in support of the three areas which cover how expenses affect employers, employees’ expectations of how their employer will treat their expenditure claims and changes in expenses practices.
The consultation is firmly focused on employee expenses, with the treatment of self-employed expenses out of scope in the call for evidence.
Abbey Tax Commentary
HMRC has a long held suspicion of what it calls ‘High Volume Agents’ who submit repayment claims on behalf of the self-employed and employees.
Over the last few years, HMRC has focused on agents who submit tax returns on behalf of subcontractor clients. The Fraud Unit in Leeds has instigated visits to accountancy practices in order to understand the business records seen and to establish the checks conducted, prior to repayment claims being made.
Of particular concern to HMRC have been the agents whose fee is determined by the quantum of repayment secured or those practices in the online marketplace who never physically meet their clients, but handle the claim process over the telephone and by email.
This consultation signals a shift in emphasis to employee expenses, but many of the same group of ‘High Volume Agents’ are active in this market as well, often receiving the repayment direct from HMRC, before taking their fee and passing the balance to the end client.
Undoubtedly one of the factors which has led to the growth in the repayment claim market is the ability of some ‘High Volume Agents’ to rapidly build their businesses, typically by a prominent online presence, advertising a full range of expenses available to be claimed and potential payouts, with favourable published testimonials further assisting with marketing and securing business.
However, it is also true that employers offer more flexible working to their employees, with homeworking a central feature.
According to recent research conducted by the TUC, based on unpublished data from the Office for National Statistics (ONS):
- The number of employees who usually work from home increased by 152,000 in 2016.
- The number of women working from home has increased by 10.5% (64,000) over the same time frame although;
- Men still account for the majority of homeworkers, with 966,000 regularly working from home in 2016, compared to 673,000 women.
As much as HMRC may reasonably suspect some claims have been inflated with encouragement, the changing demographics of our working patterns are surely playing a part as well.
The consultation document acknowledges HMRC has ‘very limited data’ to explain the increase in claims.
Back in November 2014, the National Audit Office produced a report titled ‘The effective management of tax reliefs’. At the time Sir Amyas Morse, head of the National Audit Office, commented:
“HM Treasury and HMRC do not keep track of tax reliefs intended to change behaviour, or adequately report to Parliament or the public on whether tax reliefs are expensive or work as expected. We found some examples where HMRC and HM Treasury proactively monitored and evaluated tax reliefs, but in general the Departments do not test whether their aims for the reliefs are being achieved. Until they monitor the use and impact of tax reliefs, and act promptly to analyse increases in their costs, HMRC and the Treasury’s administration of tax reliefs cannot be value for money.”
Now may well be an opportune time for HMRC to pause and consider a far more fundamental approach, including behavioural and economic objectives, alongside a closer examination of labour force surveys regularly conducted by the ONS.
If you would like to discuss this article further or have any questions, please contact Guy Smith, our Head of Technical Research.
About the author
Guy Smith is our Head of Technical Research, with specific responsibility for Making Tax Digital. He worked for HMRC for 15 years, most latterly as a tax inspector, before joining Abbey Tax in 2003 as a Senior Tax Consultant. Alongside his role at Abbey Tax, Guy is also a Consultant Editor and Author for Tolley and sits on the ICAS Technical Bulletin editorial board. Guy has attended several HMRC presentations on Making Tax Digital and recently participated in an Agent Strategy Design Workshop.
About the company
Abbey Tax is the UK’s largest independent tax consultancy and adviser to the accountancy profession. With the reputation of delivering the highest service standards within the fee protection insurance market, Abbey Tax is the trusted partner for over 2,500 UK accountancy practices.
This blog is one of a series of articles from our commercial partners.
The views expressed are those of the author and not necessarily those of ICAS.