In advance of the upcoming budget, HMRC has announced that from this week, the process for claiming PAYE employment expenses is changing. This is being done to stamp out ineligible claims and tax abuse and will require claimants to use a P87 form and providing supporting evidence will be compulsory.
Put simply, a P87 is a form that employees can use to claim Income Tax relief on money they spend on work expenses (known as ‘out-of-pocket expenses’). These expenses may include items such as professional subscriptions, work uniform, tools and business travel. The P87 is available as a paper form but up to now, employees could claim online via the HMRC website to claim tax relief on any work-related expenses.
What can be claimed for on a P87?
The P87 form is used to claim tax relief if you’re an employee of a business and the total value of expenses you’re claiming for is less than £2,500 for the tax year. You may be able to claim tax relief for a variety of expenses, Such as:
- Flat rate expenses
- Uniform washing/replacement allowance
- Working from home allowance
- Union and professional fees
- Travel costs to temporary workplaces (excludes normal commuting)
- Other work-related travel
- Tools and toolboxes
- Accommodation at temporary workplaces
- Hotel and meal expenses (also known as subsistence)
There is also section for other expenses which can be used for entering any other expenses that don’t fit into one of the categories provided.
What are the changes?
Until this week, anybody wanting to claim employment expenses, only needed to complete form P87 (either online or by using the paper version), but from Monday 14th October, all claimants have to use a paper P87 form and provide supporting evidence to prove their eligibility.
HMRC is tightening the process and adopting a “check first, pay later” approach after reporting that the current way of working has resulted in many ineligible claims for employment expenses. The changes therefore have been brought into force to reduce the tax risk especially from fraudulent claims.
This change of policy comes after HMRC suspended the processing of some claims on 10th June whilst they considered the best way to proceed. The new approach will include increased checks alongside the changes to processes. HMRC will also only pay out after the taxpayer (or possibly their accountant) has sent evidence that proves to HMRC that they are entitled to the tax relief.
Going online is no longer an option
Employees incurring job-related expenses of up to £2,500 per tax year which are not fully reimbursed by their employer will need to provide the information alongside the printed P87 form in the post. HMRC claim that adding the additional evidence should not “cause anyone any difficulties”, an opinion not shared by most employers and accountants.
HMRC said it is “working at a pace” to reinstate the digital process. Those looking to claim for uniform, work clothing and tool expenses will only have to wait until 31st October for a digital route to claim, with the bulk of claims available digitally by April 2025. The address to send your P87 is: Pay As You Earn and Self-Assessment, HM Revenue and Customs, BX9 1AS.
What evidence is needed?
Under the new rules the claimant must state which employment incurred the expense and if their employer reimbursed any of the cost, plus the evidence or proof. They also must have paid tax in the year they are claiming.
Examples of the evidence needed range from a mileage log to claim for mileage allowance; copies of receipts or other evidence showing how much was paid for subscriptions to professional bodies; evidence that the claimant must work from home, such as their employment contract, plus evidence of the additional costs incurred. However, anyone who just chooses to work from home, is not eligible to claim.
However, whilst evidence like receipts is needed for items such as hotel and meal expenses – where the claimant would have to include the date of a stay or a meal – the one area where it is not required is for flat rate expenses (FRE) claims. Instead, the onus is on the taxpayer to make sure they are eligible to claim FRE; with HMRC carrying checks to identify ineligible claimants. For a full list of FRE’s, go to: https://www.gov.uk/guidance/job-expenses-for-uniforms-work-clothing-and-tools
Why are the rules being tightened?
The need to supply evidence is part of other changes HMRC has made to reduce tax abuse and mistakes. Up to now, HMRC’s main target has been agents. who target employees to claim reimbursement of tax on their behalf, using a ‘one size fits all’ approach, with the refund going to the agent who only passes on the refund after deducting their fee. Not only does this, more often than not, result in the employee getting nothing, but can also mean that a significant proportion of the claims are for ineligible recipients.
HMRC has added additional compulsory boxes to the employment-related expenses form in an effort to curtail spurious claims and instructed that any claim must be submitted on HMRC’s prescribed form. Previously, tax refund companies would use customised claim forms or letters which would include a deed of assignment, where the tax refunds would divert the repayment to the high-volume agent.
Accountant’s view
This tightening of the rules is partly as a result of the explosion of claims during Covid, especially for home expenses and it has taken HMRC until now to wake up to the fact that a significant percentage of the claims for reimbursement are either in error or potentially fraudulent.
