Time to check those expenses written off against tax – or pay the price
Throughout my career I have encountered characters bragging about the fact that they can claim something as an expense or that, with a wink and a nudge, their accountant will write off as an expense.
It always struck me that such behaviour was naive and potentially dangerous. My reservations are being proven correct – the Revenue Commissioners have begun to particularly focus on expense reimbursements.
Errors are often uncovered and they can trigger more in-depth investigations. Moreover, when interest and penalties are applied, the amount owed can be very onerous.
Generally, any payment by an employer to reimburse an employee or a director for out-of-pocket expenses can be made tax free. However, the expense must be wholly, exclusively and necessarily incurred for the purposes of the business.
Normally, entertainment expenses will not be considered wholly, exclusively and necessarily incurred for the purposes of a business. This includes wining and dining clients.
Equally, the cost of formal work clothes is not considered an expense incurred exclusively for the purposes of the business. Also, the cost of travel between an employee's home and ordinary place of work is not allowed.
Where an expense is incurred for a mixed business and personal use, a reasonable basis of apportionment should be applied. Reimbursement of mobile phone, landline, computer and internet expenses is permitted where any private use is incidental to the business use.
An employer may reimburse exam fees or professional subscriptions where the exams or memberships are directly related to the employee's job.
The Revenue Commissioners will permit unvouched expenses of €3.20 per day in respect of a home office (rent, light, heat and internet). However, actual vouched expenses greater than this amount may be claimed.
Employers can make tax-free reimbursements in respect of fuel and food costs incurred by an employee or director while travelling on business. Where an employee is reimbursed on the basis of actual receipts and invoices submitted, these should be retained by the employer.
Alternatively, the civil service rates system can be operated. The system provides certain amounts for fuel based on engine size and distance travelled, and for meals and accommodation based on the length of time away from the ordinary place of business.
Crucially, if civil service rates (table) are applied, the following information must be retained for six years:
• The name and address of the director or employee.
• The date of the journey.
• The reason for the journey.
• The distance travelled (km).
• The starting point, destination and finishing point of the journey.
• The basis for reimbursement (i.e. 10 hours away from normal place of work).
In the case of international travel, specific subsistence rates are published for each country. For prolonged overseas trips (over a month), the rates are discounted.
If the business is the subject of a Revenue audit, the Revenue Commissioners will require this information. Anecdotal evidence suggests that they will go to considerable lengths to verify or debunk the information provided.
If an expense reimbursement is not allowed, the amount paid to the employee or director will be treated as a net payment.
The gross amount will normally be calculated by dividing by 0.48. PAYE, PRSI and USC will have to be applied to the gross amount.
For PRSI Class A employees, the employer's contribution of 10.75pc must also be applied.
Any underpayment of tax will have to be accompanied by interest at 10pc per annum and penalties ranging from 3pc to 100pc depending on the level of co-operation with Revenue, whether payment can be made, whether the default was deliberate or the result of carelessness and whether the disclosure was prompted or unprompted.
In recent months, certain sections of the Revenue Commissioners have indicated that they will treat reimbursement errors as deliberate unless the taxpayer can establish the contrary.
The important point here is that deliberate behaviour attracts a penalty of 50pc of the tax due whereas careless behaviour attracts 20pc.
Clearly, reimbursed expenses can present a time-consuming and costly tax headache for businesses.
Where defaults are disclosed to the Revenue Commissioners prior to an audit notice being issued, penalties can be minimised.
Now would be an opportune time to carry out a review of records and systems to ensure they will stand up to scrutiny. If errors are found, serious consideration should be given to making a disclosure to the Revenue Commissioners.
Paul Brady is a chartered tax adviser and founder of TaxandLegal.ie