The general rule for employee expenses is very restrictive. It has a logic of its own. Because the rule is so restrictive we need to look at the actual words of the taxes acts, even though this might sound rather daunting. The law says that in order for an employee to be able to treat a work expenses as an allowable deduction for tax, two conditions must be fulfilled –
- the employee is obliged to incur and pay it as holder of the employment, and
- the amount is incurred wholly, exclusively and necessarily in the performance of the duties of the employment.
Every word in these sentences counts. You can read more about how HMRC interprets these rules on the HMRC website at http://www.hmrc.gov.uk/manuals/eimanual/EIM31630.htm.
To give you a flavour of how these rules are used – HMRC will expect:
- The expenses was necessary, not just for you, but for any employee doing your job
- The expense was made while you were actually engaged in your job – and not in an important but related activity
- The expense must be less than your earnings in that particular job or role (http://www.hmrc.gov.uk/manuals/eimanual/EIM31658.htm)
- The expense must be wholly and exclusively for the particular employment. It must not be, for example, partly for another role or job or for personal reasons. (Though in some cases it may be possible to allow a proportion of the cost, if this can be specifically associated with the employment).
These tests can be very hard to pass: particularly if your employer does not reimburse you for a work expense you have incurred. In this case HMRC is likely to argue that it wasn’t necessary!
To give you an idea of how restrictive the rule can be, HMRC gives the example of someone in a chemical factory who buys his own overall rather than using the standard issue. HMRC considers that the cost of the overalls is not allowable because it would not have been incurred by everyone who might do the same job (see http://www.hmrc.gov.uk/manuals/eimanual/EIM31643.htm).
There are many detailed rules about expenses so this area can be rather a minefield. We will look at some of the main areas below.
In this section we will look at:
- Expenses which are reimbursed
- Expenses which are not reimbursed
- Agreed standard allowances for employees
- Rules for expenses for specific costs and occupations
- Special rules for home-working employees
- Travel costs
- Working on a ship