Travel and subsistence 28th March 2016

Posted in: Business Tax, Corporation Tax, Personal Tax

Employees – subsistence expenses

Where an employee is required to stay overnight away from home on business, the cost of travel, accommodation and meals is an allowable expense. Normally, the employee will incur the cost of the trip and reclaim the cost from the employer.

In addition, incidental expenses paid by an employer to an employee when staying away from home are tax free payments. These payments would be to cover other items, such as phone calls, parking fees and laundry expenses. HMRC allow £5 per night while working in the UK and £10 per night while working abroad. These amounts do not need to be receipted.

There are also scale rates, which allow an employer to pay a set amount to an employee to cover the cost of travel and subsistence. The employee must actually incur these costs and the employer must check that costs have been incurred by checking a sample of receipts. HMRC acknowledge that it is impractical to check all expenditure on such occasions, but do require that basic checks are made. Scale rates must be agreed with HMRC in advance, else the rule above concerning the reimbursement of receipted expenses will apply.

There are worldwide scale rates that apply when travelling abroad. These can be found here.

If you advance money to your employees to cover costs (round sum allowances) these must be taxed as earnings via PAYE. The employee will then make a claim for the actual expenses incurred as a deduction against taxable earnings.

More information on how reimbursements are taxed for income tax and NI can be found here.

Employees working through an intermediary

Until recently, there was a nice little loophole for contractos that worked through an intermediary, either their own limited company (personal service company) or an umbrella company.

These employees were deemed to be home based. Provided the term of their contracts did not exceed 24 months and thus become a permanent workplace, the employee would be able to claim their travel expenses to and from the place where they carried out their contractural duties.

Contrast this with a normal employee who is unable to claim his travel expense to/from work (their ordinary place of business) and you can see that things were not equal. You would go to work every day and would not be able to claim your commuting costs, but the person sitting next you was doing just that.

In October 2015, the Government released a discussion paper on travel subsistence with a number of proposals. Following feedback changes have been implemented, which will take effect from April 2016. Essentially, anyone caught by IR35 will no longer be able to claim travel expenses to and from home and work. You may see other articles talk about Supervision, Direction and Control (SDC) in this context, but it essentially means IR35.

There is a very good write up on the proposed changes on Nicola Ross Martin’s webpage here.

Business mileage rates

If an employee uses their own car for business purposes, the employer can reimburse the employee for the business mileage incurred. The rates of reimbursement are:

Vehicle First 10,000 business miles Additional business miles
Cars 45p 25p
Motorcycles 24p 24p
Bicycles 20p 20p

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If the employer does not reimburse the employee at the rates in the table above, then either a taxable benefit will arise on the employee or the employee will end up with a deductible expense that can be set against their taxable income.

For example, Greg uses his car for business purposes. His employer reimburses Greg at 60p for every business mile he travels. Greg travels 15,000 business miles in the year.

Greg will end up with a taxable benefit as follows:

Reimbursements: 15,000 x 60p £9,000
Less: tax exempt amounts
– 10,000 x 45p (4,500)
– 5,000 x 25p (1,250)
Taxable benefit £3,250

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Likewise, if an employee is reimbursed at a rate lower than the tax exempt amounts, then an amount deductible from earnings will result.

Traders – subsistence

If you’re not an employee, but instead a sole trader or partner in a partnership, then the rules are a little different.

The general rule can be found here. Essentially, it says food and drink and accommodation is not an expense incurred wholly and exclusively for the business, since everyone must eat in order to live.

However, it makes allowances for travel and subsistence costs in these circumstances:

Occasional journeys outside the normal pattern and itinerant trades

An expense is allowable against income for the cost of travelling to the place where either:

  • the trade is one that involves travel from place to place at the time the expense is incurred; or
  • the trader does not travel to the place more than occasionally in the course of the trade and either:
    • the travel concerned is not part of the trader’s normal pattern of travel; or
    • the trader does not have such a normal pattern of travel.

Overnight subsistence and accommodation expenses

As in the case of employees, traders may claim the costs of overnight stays away from home for business reasons as an expense. However, the costs must be reasonable.

However, this does not extend to overnight accommodation and subsistence at the base of trade, even if there is a contractual requirement for the trader to reside in a particular place.