How to avoid tax on staff expenses

Can I let staff be paid for expenses through a round sum monthly allowance?

CO writes: I run a small business and have taken on new sales staff. We have been discussing the best way to reimburse them for their motoring costs, telephone bills and other items. I had suggested a round sum monthly allowance that I would add to their salary each month to cover these costs. However, I am now having second thoughts, as I have been advised that these amounts should be taxed through the payroll system rather than paid gross. Can you confirm this?

The round sum allowances you were proposing would be treated as additional gross pay and would therefore be correctly taxed through the payroll, writes Chris Lane, a partner at Kingston Smith LLP.

The problem is the round sum nature of the expenses and the fact that they have no relationship to the actual expenses. For example, if they were payments on account of the actual expenses incurred by the employees, then these sums would not be treated as additional pay.

In respect of the motoring expenses, it is the norm for an employer to pay a mileage rate. HM Revenue & Customs (HMRC) has set a standard 45p-a-mile rate for the first 10,000 business miles; over this, the rate drops to 25p a mile.

It is best to use these published rates because you will then know that HMRC will not challenge them. If you were to use a higher rate, then HMRC could seek to tax a profit element on the employee.

If you use any mileage-based system, your employees will need to keep a log of the miles driven each day so that their mileage claims can be supported.

For the other expenses I suggest that you give your staff a small float in advance and then ask them to submit a monthly expenses claim to recover the business costs they have incurred.