NIM05030 - Class 1 NICs : Expenses and allowances : Evidence necessary to identify business expenses
Class 1 NICs are payable in law to the Inland Revenue and it is
entitled to receive what is due to be paid.
Although the onus is on employers to ensure that NICs are
calculated correctly and on the right amount of earnings, the
Inland Revenue is entitled to verify, through its officials, that
the calculation has been based on the correct amount of earnings.
In order to be able to provide such verification, employers
need to ensure that they have evidence to identify the business
expenses actually incurred so that they can demonstrate:
- the amount of expenses involved
- that the expenses were incurred as part of the employee’s work, and
- that the amount disregarded when calculating earnings for NICs purposes was correctly excluded from gross pay.
The legislation concerning NICs does not contain any rules about
what type of evidence is required to support the identification of
business expenses actually incurred. To confirm the purpose of a
payment and the amount of any business element the Inland Revenue
will consider all and any evidence which may be available.
In dealing with any expense a common sense, reasonable
approach must be applied. All relevant information, or evidence,
must be considered and Employer Compliance Officers will need to
exercise a degree of judgement, especially where there is no
documentary evidence available and oral evidence has to be
obtained.
Generally, consideration of expense payments will require a
two-step approach:
- firstly, to establish that a business expense has been incurred, and
- secondly, to determine the amount involved.
It is not possible to supply a definitive list of the types of evidence employers could hold to aid the process. The following paragraphs provide some useful guidelines but you should remember that any evidence which is available should be taken into consideration.
Documentary evidence
The most common type of evidence produced by employers will be documentary evidence and, although not exhaustive, the following are good examples of what might be available:
- a log of business telephone calls or business mileage
- credit card bills/vouchers
- receipts
- diaries showing business engagements/appointments, etc.
- a representative survey of the costs involved
- an Inland Revenue dispensation. (See NIM05500 for general guidance regarding dispensations.)
Some employers may produce P11Ds as evidence, or alternatively, a letter from the Inspector of Taxes indicating that a certain percentage of payments has been agreed as business expenditure for tax purposes. In that event, you should accept that a similar split is in order for Class 1 NICs purposes. The employer should be able to demonstrate the basis on which the agreement was reached.
Oral evidence
Any evidence should be taken into account when trying to identify business expenses. This means that as well as documentary evidence, oral evidence should be considered.
Example
Because of the time difference, an employee is required to make, from home, a business call to a foreign country. If no dispensation is held for the reimbursement by the employer (see NIM05500) and itemised bills are not available then any explanation which is offered should be considered. The oral evidence regarding the nature of the call, the reason for it, the cost, etc. should be considered bearing in mind the type of employment concerned, and whether it is the sort of business which might need to make calls as alleged.
