The impact of the pandemic on expenses & benefits

Tax compliance in the wake of the pandemic

Tax compliance in the wake of the pandemic

Many employers will have seen a fall in the volume of claims and expenditure during 2020/21 due to employees working from home and travel restrictions introduced by government in response to the pandemic.  However, employers who revised their expenses and benefits policies to support new ways of working are likely to have seen significant changes in the make-up of employees’ expense claims. In some cases, the cost of desks, chairs and monitors have been met by employers, whilst others have paid for exceptional travel into the office by taxi, coronavirus tests and quarantine hotels when traveling for work.

The tax treatment of these expenses will vary.  Several new exemptions and reliefs have been introduced temporarily to support these new arrangements, whilst in other cases existing provisions may be applied to remove the tax liability which would otherwise arise where such costs are met by the employer.  When preparing Forms P11D and the annual PAYE Settlement Agreement (PSA) this Summer, the challenge for employers will be to ensure that exemptions and reliefs are correctly applied to these new types of expenses from the past year, and that taxable items are categorised as such.  For many employers, these changes mean it will be necessary to modify year end processes and ensure that up-to-date guidance is available to their teams tasked with analysing employees’ expenses & benefits data.  

It may also be necessary to update the PSA contract with HMRC to ensure that new taxable items are covered by appropriate categories in the agreement.  Where the new items relate solely to coronavirus-linked expenses during 2020/21 and are considered minor, irregular or impractical to report elsewhere, HMRC has confirmed that they will add an appendix to the employer’s current PSA contract, provided that applications are made before the deadline of 6 July 2021.

Action for employers: It is recommended that employers start preparing for their 2020/21 P11D and PSA processes as soon as possible.

Questions to consider:

  • Have you applied the temporary coronavirus exemptions correctly?  Whilst these measures appear generous, the devil is in the detail.  For example, can you demonstrate that home office equipment costs were reimbursed on ‘similar terms’ and the other qualifying conditions were met?  Did any COVID-19 tests provided meet the conditions for a benefit-in-kind exemption?
  • Were deductions for payrolled benefits paused for furloughed employees? If so, it’s important to ensure those benefits are reported to HMRC on the correct return and that any reporting implications for subsequent years are considered.
  • Where a specific coronavirus exemption doesn’t apply, is the expense or benefit covered by another exemption, for example for trivial benefits where the cost doesn’t exceed £50 and other qualifying conditions are met?
  • Did your travel expenses policy change? Some employers regarded employees’ homes as permanent workplaces during lockdown, and allowed claims for journeys that started at home, even to employees’ former workplaces.  Whilst the rules are complex, in most cases travel costs between home and a permanent workplace are likely to be taxable.
  • Did you reimburse additional home working expenses for increased utility bills etc.?  It’s important to ensure the amounts covered meet the requirements of the exemption, and either fall within the £6 per week limit for unreceipted expenses, are based on a scale rate agreed with HMRC, or are fully evidenced.

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