By Nigel Holmes, Senior Tax Specialist at Catax.
I am often asked, why would a cost qualify if it is paid by the employee and reimbursed but not if it is paid directly by the company? The issue is not as simple as that, as shown below, as taken from HMRC’s own manuals:
“Under section 1123 (3) CTA 2009, the company may reimburse expenses incurred initially by an employee, and such reimbursement may constitute qualifying staffing costs in the following circumstances.
- The expense constitutes an expense to the company of employing staff, and
- The expense is an expense the employee pays in order to fulfil the requirements of her employment.
What we mean by ‘an expense the employee pays in order to fulfil the requirements of her employment’?
- The expense must be incurred in actually carrying out the duties of the job. It is not enough for the expense to be relevant to the job, or to be incurred in connection with the duties of the job. Nor is it enough if the expense only puts the employee in a position to start work or keeps the employee qualified to do the work. On this basis, reimbursed home to work travel costs and reimbursed training costs are not encompassed by S1123(3) CTA 2009.
- We would normally treat qualifying travel and subsistence expenses paid by the employee, and refunded by her employer, as being among the types of expenses that could qualify under S1123(3) CTA 2009.”
HMRC then go on to publish four helpful examples:
- Jane is an employee, who undertakes qualifying research and development as part of her work. She travels to another location to hold a meeting to discuss the emerging findings of the research. She pays the train fare of £10, which is subsequently refunded to her by her employer.
- In this example, the £10 refunded to Jane constitutes an expense of the company of employing Jane. Jane initially paid £10 to meet an expense she incurred in order to fulfil the requirements of her employment, an expense that was personal to her and to her performance of her employment. The £10 payment is an allowable staffing cost of the company.
- Jane subsequently holds the second meeting in a different location. On this occasion, she pays £100 for the hire of a meeting room, and also £10 for her train fare. The employer refunds £110 to Jane.
- In this example, the £10 refund of the train fare is correctly treated as allowable staffing costs under the same analysis as example 1.
- However, the £100 refund of the meeting room hire cost is not an allowable staff cost. The cost to the company of hiring a room is not a cost of employing staff. Neither is it a cost that relates to Jane’s performance of the requirements of her job.
- Suresh is a director of a company that carries out R&D, and he undertakes qualifying research and development as part of his work.
- He pays £1,000 for roof repairs to the company R&D facility. The company subsequently refunds £1,000 to Suresh.
- The £1,000 refund of the roof repair cost is not a qualifying staff cost. The cost of repairing the roof is not an expense of employing staff. Nor does the cost of the roof repair constitute an expense that Suresh pays in order to fulfil the requirements of his job.
- It should be remembered that reimbursed expenses, like all other categories of qualifying staff costs, are subject to section 1124 CTA 2009. See CIRD 83800. Section 1124 CTA 2009 tells us what staffing costs attributable to relevant research and development.
- Reimbursed expenses that are attributable to relevant research and development are those that are paid to, or in respect of directors or employees who are directly and actively engaged in relevant research and development. Where such directors or employees are partly engaged directly and actively in relevant research and development, an appropriate proportion of the reimbursed expense can be qualifying staff costs.
- Pavel works as R&D director for a company that carries out qualifying R&D. During January, he attends three meetings. In each case, he travels by train and taxi, and pays the costs himself, later claiming back the expense from his employer.
- 7 January – Meeting to plan a new research project
- 12 January – Meeting with a colleague to review and finalise a new feasibility study.
- 14 January – Quarterly company board meeting.
- The travel expenses for the first 2 meetings will be allowable staff costs under S1123(3) CTA 2009. The cost of attending the 14 January board meeting will not be an allowable expense.”
So, as you will see, the mere fact that an expense is reimbursed is not sufficient, it has to:
- Be an expense incurred to fulfil the individual’s employment and;
- Relate to the R&D projects undertaken
Hence why if the costs were paid directly by the company they would often fail to meet the first criteria.
It is a complicated situation and does confuse clients who may wish to reconsider their expense policy, but merely allowing staff to pay for everything to boost an R&D tax relief claim will not have the desired effect as in this situation many costs will not have been incurred to fulfil the individual’s employment.