The next step

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Avoiding class 1 contributions on expenses payments

Background

There had been long-standing confusion over whether or not reimbursed expenses were subject to NI. Fortunately, the case of Overdrive Credit Cards Limited 1991 (Overdrive) gave clear guidance which still applies. But it seems that many employers have forgotten about this and are now being caught out during PAYE inspections.

Are you at risk?

The Taxman’s PAYE inspectors are trained to look out for any private benefit derived from expenses reimbursed to employees and directors. These can result in additional NI due. Example. Jones is employed as a salesman and drives extensively for work in his own car. Most of the fuel he buys is for business travel, but some is for private motoring. His employer reimburses him the cost of all the fuel. The private element is therefore a benefit-in-kind on which the employer must pay NI. If the correct procedure is followed by Jones, there is no employees’ NI due. If he gets the procedure wrong, NI will be due on the cost of fuel used for non-business travel. It’s up to the employer to account for these under PAYE. So if Jones gets it wrong, it’s his employer that will pick up the bill.

A simple procedure?

We know this may sound crazy, but to ensure extra NI is avoided, Jones must tell the petrol station attendant that he is filling up with fuel on behalf of his employer. And that you, not him, are liable for the cost, although he will be paying for it. The attendant must acknowledge and accept the arrangement in advance of Jones putting fuel in the car.

Trap. The Overdrive principle can apply to any purchase where there’s a private element to the spending, not just fuel (see The next step).

How can the Taxman prove it?

The law says the Taxman doesn’t have to prove a thing. After Overdrive there was a flurry of publicity which led to employers putting procedures in place to avoid the trap. But some 18 years later things have slipped and now the Taxman is cashing in once more. What steps should you take to tackle the problem?

Getting it right

The Taxman will want to see that the following procedures have been adopted:

• the employee is authorised to purchase goods/services on your behalf
• you have advised the employee to tell the seller that the purchase is being made on your behalf; and
• the employee actually told the vendor that they were acting on behalf of their employer before the purchase was made.

Tip 1. If possible get your employees to refuel at designated stations. Make a standing arrangement to confirm that an employee is acting as your agent, i.e. on your behalf, each time they refuel.

Tip 2. Add a statement to your expense forms that says that your employee told the vendor, and they acknowledged that the purchase was being made on your behalf.

For examples of when the Overdrive principle could apply, visit http://tax.indicator.co.uk (TX 09.12.04).