EMPLOYEES EXPENSES
In order for an employee to claim a tax deduction for expenses they must be incurred wholly exclusively and necessarily in the performance of his duties.
The expenses that can be claimed fall broadly under three main headings namely: interest paid, travelling expenses and Use of equipment and working from home.
Interest paid
Allowable interest includes the following:
(a) On a loan to buy a partnership share, to introduce capital to a partnership or to lend money to it, providing that you
are not a limited partner or a partner in an "investment" limited liability partnership (i.e. one of whose business
consists wholly or mainly of making investments) and providing you are still a partner when the interest is paid.
(b) On a loan to buy shares in or lend money to a trading company controlled either by its directors or by five or fewer
people (known as a close company), so long as, at the time the interest is paid, either you own more than 5% of the
issued share capital, however small, and work for the greater part of your time in the management or conduct of the
company or an associated company. (But if you or your spouse have claimed income tax relief or capital gains
deferral relief in respect of shares acquired under the Enterprise Investment Scheme, you cannot also claim interest
relief on a loan to buy the shares.)
(c) On a loan to buy plant or machinery, other than cars, vans, motor cycles or bicycles, for use in your partnership or
employment. Relief is available for interest paid in the tax year of purchase and the next three tax years. Where
there is part private use, only the business proportion qualifies.
(d) On a loan to personal representatives of a deceased person to pay inheritance tax.
(e) On a loan to acquire shares in an employee-controlled trading company.
(f) On a loan to acquire one or more shares in, or lend money to, a co-operative.
Relief under (a), (b) (e) and (f) is restricted if the shares are sold or the partnership, close company or co-operative repays all or part of the loan, without your borrowing being reduced by an equivalent amount.
Interest is allowable on loans which repay existing qualifying loans.
Relief is only available as the interest is paid. It is not spread over the period of accrual and will not be allowed if never paid.
Bank overdraft interest is never allowed as a deduction from total income. Relief is only available where the overdraft is part of the funding of a trade or property letting and therefore allowable as an expense in arriving at trading or rental profits.
Travelling expenses
You can deduct travelling expenses from employment income and are entitled to relief for the full cost you are obliged to incur in travelling in the performance of your duties or travelling to or from a place you have to attend in the performance of your duties, as long as the journey is not ordinary commuting between your home and your permanent workplace or private travel (i.e. travel for a private rather than business purpose).
Site-based employees with no permanent workplace are allowed the cost of travelling to and from home (unless the job at the site is expected to last for more than 24 months, in which case the site counts as a permanent work-place). The full cost of meals and accommodation while travelling or staying away on business is allowable as part of the cost of the travel. Business travel includes travelling on business from home where the nature of your job requires you to carry out your duties at home.
Where a journey has both a business and a private purpose, the expense will be allowed if the journey is substantially for business purposes. As far as NIC's are concerned, they will normally only be payable if your employer makes a payment to you that exceeds the cost of a business journey. Payment by the employer of congestion charges in London (or elsewhere) will in the first instance count as an employee benefit where you use your own car, and will be offset by an equivalent allowable expense if incurred on business travel.
In most cases your employer will reimburse your allowable expenses so that your expenditure is balanced by the employer's payment. Where this is not the case you will need to claim tax relief yourself.
Using your own transport for business *
There is a statutory system of tax-free approved mileage allowances for business journeys in your own transport. You are taxable only on any excess over the approved rates. Employers will report on any such excess on the year-end form P11D or P9D (see 10.52). The mileage rates are as follows:
| Cars and Vans: | First 10,000 miles in a tax year | 40p per mile |
| Each additional mile: | 25p per mile | |
| Motor cycles | 24p per mile | |
| Bicycles | 20p per mile | |
If your employer pays less than these amounts, you can claim tax relief for the additional amount you have paid. If you carry fellow employees on business trips, either in your own car or van or an employee's car or van, and you receive mileage allowance payments, the employer may pay you up to 5p per mile for each fellow employee free of tax and NIC's. You cannot claim any relief if your employer does not pay an allowance.
For various occupations, flat rate expenses have been negotiated for the upkeep of tools and special clothing, although this does not stop you claiming relief for the actual cost, if higher.
Use of equipment and working from home
You can claim a deduction in calculating the tax on your earnings for capital; allowances if you buy equipment that is necessarily provided for use in your job, excluding car, motor cycle or bicycles) restricted by any private use proportion.
If it is necessary for you to work at home, you may claim the appropriate proportion of the cost of light, heat , telephone calls, etc. If you use a room exclusively for work, HMRC previously allowed you to deduct a proportion of your council tax but this is no longer permitted. Reasonable expense payments by employers to cover additional household expenses are exempt from tax. HMRC have stated that up to £3 a week may be paid from 6 April 2008 without supporting evidence of actual costs. They will allow a similar deduction for expenses met by the employee himself.
Footnote: Use of vehicle mileage rates for the self-employed.
Self employed taxpayers can compute their expenses using a fixed rate per business mile if the annual turnover of their business is less than the VAT registration threshold (£67,000 for 2008/09) when they first use the vehicle. The mileage rate basis must be applied consistently from year to year. It can be changed only when a vehicle is replaced.
If the turnover increases and exceeds the VAT registration threshold, or if the threshold is reduced, then the taxpayer should continue to use the mileage rate basis until the vehicle is replaced. The mileage rate covers the cost of running and maintaining the vehicle, such as fuel, oil, servicing, repairs, insurance, vehicle excise duty and MOT and also an element to allow for depreciation/capital allowance. It does not cover costs that are specific to a particular journey, such as tolls, congestion charges and parking fees. These will be allowable for tax purposes where they are incurred solely for business purposes. The taxpayer may also claim the business proportion of the interest on any loan used to purchase the vehicle.
The relevant mileage rates are as shown above. *
Further advice
For further advice about the tax deductions available to employees please contact us by telephone on 01299 879140.
