Understanding HMRC's new guidelines on employment expense claims and risks

Employers can choose to reimburse expenses incurred by an employee. If not reimbursed, the employee can claim income tax relief through PAYE for allowable expenses from HMRC, up to £2,500. HMRC have identified a growing tax risk driven by ineligible claims for employment expenses, often by third parties making claims on behalf of employees and taking a fee for doing so.

In June 2024, HMRC suspended processing some claims for tax relief on employment expenses whilst they considered the best way to manage this risk. HMRC expect that employees making genuine claims will be able to provide the relevant evidence to support their claims, which can be made online. HMRC’s Don’t Get Caught Out campaign reminds employees to check they are eligible before claiming tax relief on work expenses. It also raises awareness of the risks of submitting ineligible tax refund claims when using some repayment agents.

Evidence requirements for employment expense claims and risks

Employees must tell HMRC which employment they incurred the expense for, as well as whether their employer reimbursed any of the cost. If they did, they must show evidence of how much. They must also have paid tax in the year that they spent money on the expense that they’re claiming. How much they can claim depends on the rate that they pay tax. For example, if the employee spent £60 and they pay tax at a rate of 20%, the tax relief they can claim is £12. Examples of some of the types of evidence HMRC would expect claimants to provide are listed below:

Subscriptions to professional bodies – Copies of receipts, or other evidence, that shows how much was paid for each professional subscription claimed
Mileage allowance – A copy of a mileage log for each employment. This should include the reason for every journey and the postcodes for the start and finishing points
Hotel and meal expenses (subsistence) – Copies of receipts that include the date of a stay or a meal and the name of the hotel or restaurant
Expenses for working from home – Evidence that the employee must work from home, such as a copy of their employment contract. If it’s not stated in the employment contract, HMRC will need something else that explicitly states the employee must work from home. If it’s the employee’s choice to work from home i.e. hybrid working, they can’t claim this expense
Other expenses – A full list of the other expenses that are being claimed and the employments they’re for. HMRC will also need copies of receipts or other evidence that show the name of the item and that the employee has paid for it
Uniform, work clothing and tool expenses (also known as flat rate expenses) – HMRC will not require evidence for these flat rate expenses (FRE) claims. However, employees are still responsible for making sure they are eligible to claim FRE. HMRC will still carry out risking to identify customers who may not be eligible to claim FRE.

Large businesses: Employment expense claims and associated risks

HMRC has written to all large employers and public bodies via their customer compliance managers, to make sure they are aware of these changes as they are relevant to employers and employees. HMRC have requested that large employers take the following steps:

Read the issue briefing: HMRC issue briefing: Evidence required to claim PAYE (P87) employment expenses – GOV.UK
Update internal processes to reflect these changes in PAYE employment expense claim
Ensure payroll and HR departments are aware of the new requirements for employee expense claims
Direct employees to HMRC’s Don’t Get Caught Out campaign page for guidance on allowable expenses. And to the GOV.UK expense eligibility checker
Further resources to help employers communicate the Don’t Get Caught campaign can be found within our toolkit here: Tax relief on work expenses: communication resources – GOV.UK

HMRC’s message does not place any legal obligations on employers to carry out these steps. However, it does appear that HMRC seem to think they have a much better chance of their message getting across where it is communicated internally by employers. Most employers, especially large ones, will be reimbursing all reasonable business expenses in line with the limits in their expense policy. It is hard therefore to understand what material impact HMRC might think this action will have. It appears their campaign in general is targets at unscrupulous online expense claim repayment agents, who submit ineligible claims on behalf of employees, taking a fee for doing so, and leaving the employee to foot the bill when HMRC deny the claim.

An example from HMRC’s Don’t Get Caught Out campaign page below illustrates this:

Mike is a healthcare worker. A colleague suggests they use a uniform expense refund company to claim some money back from HMRC. On the company’s website, he uses a refund calculator that indicates he can claim £4,000 back from HMRC in work-related expenses.

The company later takes £1,600 of fees from the £4,000 refund paid by HMRC. Although surprised by the sizable fee, Mike’s still pleased about the extra cash. A year later, HMRC informs him he wasn’t eligible for the expenses claimed on his behalf – and that he must pay back the full £4,000, plus interest.

Shocked and annoyed, Mike realises he can’t reclaim the £1,600 fee from the company because he signed a third-party agreement. Ultimately, he is responsible for his own tax affairs, even though he used a company to claim on his behalf. After speaking to HMRC, Mike realises there were some red flags that the company just wanted to bag a commission, without checking if he was eligible to make a claim. For a start, the company never asked him to show any receipts as evidence of work costs. They also never confirmed what expenses they were claiming for on his behalf. Mike wishes he’d paid closer attention, so he didn’t get caught out by bad tax advice.

Conclusion

Ultimately, it is the employee’s responsibility to make sure they obtain and submit the relevant evidence for HMRC to consider any claims of these types. Employees should also check that the expense they are claiming for is eligible for tax relief. Employers can help as far as reiterating the various rules and conditions of making claims, as well as updating internal policies. If you want to discuss any of the above, or any other employment tax matters, please contact Joe Rowsell and/or Steve Ashworth.