The ‘pay day by pay day’ model of tax relief has not been outlawed and remains an option for employers, according to Alan Nolan, senior partner at employment taxation consultancy Aspire.

This is despite a recent statement from HM Revenue & Customs (HMRC) that the model does not comply with legislation.

Under the model, an employer applies income tax and National Insurance relief to the amount of expenses that an employee has incurred, with the relief applied each pay day. The effect is that only the balance is subjected to income tax and National Insurance.

HMRC recently said on its website that an employer operating such a model is not accounting for the correct Income Tax (PAYE) due to HMRC because Income Tax is an annual tax.

And it stated that when calculating earnings for the purpose of working out National Insurance Contributions (NICs), the Social Security (Contributions) Regulations 2001 do not provide for a deduction of travel expenses.

However, Nolan told Recruiter: “It was wrong to state that the ‘pay day by pay day’ model is no longer an option. According to the legislation it is still viable and has the support of recent case law.

“HMRC has merely set out its view, albeit using a flawed technical argument and has certainly not outlawed such arrangements.”

Nolan added: “HMRC is seeking to deny contractors the right to apply recognised tax and NIC principles to business expenses, which are incurred in the performance of their duties, forcing them to make claims at the end of the year without the benefit of a NIC refund. 

“Many contractors won’t make such claims due to the administrative burden of doing so,” he added.

In response, an HMRC spokesperson told Recruiter: “Which business model an employer adopts is for that employer to decide.

“Where HMRC believes that an employer is operating contrary to the Taxes Acts and Social Security Acts it will take the appropriate action. Where HMRC challenges an employer on the basis that they are failing to comply with legislation, and the employer disputes HMRC’s view, the employer is able to appeal to the Tax Tribunal.”