Outsourcing - Expenses Processing

Most businesses will incur some level of expenditure when providing services for clients. These can range from day to day expenses such as travel and accommodation to longer term investments such as property and equipment. When working as a corporate entity, the supplier may come across two different types of expenses.

Firstly, there are reimbursable expenses which are expenses paid by the supplier of the goods or services but then refunded by the client. Secondly, there are non-reimbursable, tax deductible expenses which are not paid for by the client, but which may be offset against the supplier’s corporation tax.

Reimbursable Expenses

As stated, these expenses are costs incurred by the supplier, or their employees, but later refunded by the client. The most common are travel and accommodation when the supplier’s personnel are working at a client location which is out with a reasonable commuting distance.

If the supplier is trading as a Personal Service Company (PSC), IR35 may have a bearing on whether the supplier should accept the payment of reimbursable expenses by the client. Under IR35 the supplier should be in ‘business in their own account’ and therefore projected expenses should be included within the tender, or when agreeing the charge out rate. It is then up to the supplier to maximise profits from prudent financial management of these outgoings. If the supplier decides to accept payment of all expenses out with the agreed rate, it may be used as an indicator of employment of the assigned employee to the client by HMRC.

Other reimbursable expenses such as medicals, training courses or any benefits which are also offered to client employees should be avoided at all times if the supplier is a PSC. These costs should always be a cost to the supplier on behalf of its employees.

As reimbursable expenses are recharged by the supplier to the client, they form part of the turnover and cost of sale to the supplier; in other words there would be no corporation tax due on these expenses. However, further personal tax and national insurance may be due by the employee in certain circumstances. One example is when the client pays a mileage allowance above the agreed rate of 40p per mile set by HMRC.

Non - Reimbursable Expenses

Non-reimbursable expenses are generally expenses which are incurred by the supplier, or their employees, which are not reimbursed by the client, but which may be offset against the supplier’s corporation tax liabilities. There are many restrictions and tests that have to be overcome before a deduction is obtained by the supplier, however the main point is set out by the Income Tax (Earnings and Pensions) Act 2003, Section 336 and states that the expense must be one which was wholly and exclusively incurred in the performance of the duties of the business.

In simple terms, the expense must be one that all employees of that particular employment would need to incur to perform his or her duties correctly. The expense must be incurred while performing the duties, it must have been paid for and it must only cover outgoings incurred solely for the proper provision of the said duties. Therefore any expense which is for personal gain, which hasn’t been fully incurred or paid for, or one which another employee providing the same services would not have to incur, would not be allowable.

There are various types of expenses which can be claimed through a company. They are classed as either revenue or capital expenses. Revenue expenses are short term outgoings which can be off set against tax when incurred; examples include travel, accommodation, professional fees and small pieces of equipment. Capital expenses usually include property, vehicles, computer equipment and large equipment such as machines. These expenses are off set over a period of time to stop one making a substantial gain from selling an asset not long after purchase, which has also been fully off set against tax.

Common Expenses

Travel

Business trips on the client’s behalf or traveling to a temporary place of work can be claimed. If the employee uses his or her own car they will receive a mileage rate which is in line with the HMRC approved mileage rates. These mileage rates are irrespective of engine size and are:-

Type of vehicle	First 10,000 miles	Over 10,000 miles
Motor car/van	40p per mile	25p per mile
Motorcycle	24p per mile	24p per mile
Bicycle	20p per mile	20p per mile

Please be aware that any running costs of the vehicle are not allowable as the mileage rates are designed to cover these costs.

Any business related journeys by rail, air, bus, ferry or taxis are allowable provided that the relevant receipts are kept and passed to the supplier’s accountant.

The cost of hiring a car while on client business or when traveling to and from the client’s site will be allowable as will the associated petrol costs. Receipts must always be retained.

Other costs of travel such as bridge or road tolls and car parking are allowed, provided that these are in the course of a business trip or travel to the client’s site.

Accommodation

The cost of any hotel or bed & breakfast accommodation due to nights spent away from the supplier’s normal place of work on business may be claimed.

Rented property costs are allowable where it is cheaper to rent a flat rather than pay for a hotel while on a business trip, at the client's site or elsewhere, provided that the use of the property is necessary for the location of the business trip and the supplier has a permanent place of residence elsewhere. A percentage of the costs relating to the rental of a property for a business trip, such as council tax, electricity and gas bills, contents insurance etc. are also allowable provided all receipts are kept.

Subsistence and Personal Incidental Expenses

Evening meals and out of pocket expenses such as news papers or phone calls can be claimed back provided receipts are provided.

Training Courses

Any training courses attended by employees which are directly relevant to their particular field of expertise and are wholly and exclusively for business purposes will be allowable. It must be work related training, which is defined as being any training course which will impart, instil, improve or reinforce any knowledge or skills which are likely to prove useful when performing the duties, or the courses will qualify or better qualify the individual to undertake their duties.

There are numerous others that are also allowable, however everything claimed for must be backed up by receipts and must be wholly and exclusively for business purposes.

The 24 Month Rule

A place which an employee attends for the purpose of performing duties of employment for a limited duration is a temporary workplace. However, there is a special rule which prevents a workplace being temporary when the employee attends it for a period longer than 24 months, or is likely to last more than 24 months.

The test is whether the employee will spend 40% or more of their time at a particular workplace for more than 24 months. If they do, then it will not be a temporary workplace.

If an employee of the supplier realistically expects to be at the same client location for more than 24 months, or if the contract between the supplier and client states the end date as being 24 months or longer, then the following expenses will not be allowable: travel or mileage, accommodation, subsistence and personal incidental expenses.

This 24 month rule is geographical, therefore, even if the employee moves site or provides services to a new client through the same supplier but stays in the same area to carry out the services, the expenses would not be allowable. There has to be a substantial change to the employee’s journey for the supplier to re-claim these expenses again.

Why should expenses be submitted?

The supplier’s expenditure will be deducted from the total revenue of the company before corporation tax, therefore the level of income liable for corporation tax will decrease by the value of the expense.

For example:-

Assume a company earns £1,000 and £100 is paid by the employee on business telephone calls. These costs are 100% deductible. That means all of the expense can be claimed and deducted from the company income, so:-

Your earnings - £1,000
Less deductible business expenses - £100
Profit - £900

Instead of paying corporation tax on the full £1,000 you only pay corporation tax on £900.

If you are paying tax at 20% (the small company tax rate) this expense has reduced your tax payable by £20 (£100 x 20% = £20).

Please Note - The supplier (i.e. your company) does not get 100% of the expense back from HMRC.