The basis of an employee’s claims for business travel is that the employee (including company directors) are not taxed on expenses paid to them for the cost of travel that is incurred in the course of their duties. The general rule for expenses to be tax-deductible is that the expenses must have been incurred ‘wholly and exclusively’ for the purposes of employment or trade. However, with travel, there is often a mixed use or private element (e.g. meals, overnight accommodation or other subsistence), so the tests are:
- the travel expense is necessarily incurred in the performance of the employee’s duties; or
- the travel is for ‘necessary attendance’
and, in addition, the employee must be obliged to incur the expenses as the holder of the employment. All these requirements can be found in sections 337 & 338 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA).
Where the costs of travel and subsistence are directly reimbursed by the employer to the employee this is tax neutral – allowable expenditure for the employer and no taxable benefit to the employee. But just hold on a minute – does this mean that the employee can travel first class and stay in the world’s premier hotels? Sadly, no – quite apart from the employer’s views! The level of service will need to be commensurate with the employee’s role and duties on that occasion in order for it to meet the tests set out above. If an employer chooses to meet a particularly lavish or extravagant level of expenditure, then the excess amount will be treated as a benefit in kind and taxed accordingly (unless of course this level of expenditure can be justified). And by the way, if the employer reimburses above the level of expenditure actually incurred by the employee, then the excess is treated as earnings!
Where an employee incurs expenses that are above the justifiable level, the answer may be for the employee not to claim for the excessive amount. For example, where a train fare costs £150 and the employer is only prepared to reimburse £100, the £50 is not taxable as a benefit in kind. However, if the employee considers that the full fare met the rules set out above, then he is at liberty to claim tax relief personally on the £50.
There are a number of rules about subsistence, but this rather complex area is outside the ambit of this blog.
Travel from home to place of work is not generally tax deductible, but there are some interesting exceptions (see below).
In my recent blog on company cars, we looked at the way in which this is taxed as a benefit in kind, but of course many employers reimburse employees for using their own car. This is not treated as a taxable benefit provided this does not exceed the HMRC ‘approved amount’ (currently 45p per mile up to 10,000 per annum and 25p thereafter for each tax year). Of course, the miles reimbursed must meet the general tests set out at the start of this blog! If the employer pays a higher rate, then the excess is taxed as earnings. If the rate is below the HMRC approved amount then the employee can claim tax relief on the difference.
When defining ‘place of work’ this may be either permanent or temporary. Most of the time this will be obvious, but if for example an employee is required to attend at a different location say two days a week this is likely to be more than 40% of his working time and if this is likely to continue for more than 24 months, it will not be classed as a temporary workplace. Why is this important? Because travel from home to a temporary workplace is tax-deductible! The rules defining a permanent or temporary workplace are quite complex. For example, a salesman responsible for a particular area will generally be treated as having reached his place of work when he reaches the border of that area.
Much more common is the situation where an employee travels as part of his job, for example to see customers. Generally speaking these costs will be tax-deductible as long as they meet the tests. There has been some interesting case law on whether specific travel costs, even though business-related, actually meet the tests in section 337 & 338 ITEPA. It may for example be desirable for a director of a farming company to travel to the USA to look at farming techniques but not actually necessary for him to do so!
And finally, what about what used to be known as ‘triangular travel’? This is where an employee normally travels from his home (A) to his permanent place of work (B) but on occasions goes straight from A to another location (C) for business purposes (e.g. to call on a customer) without going to B first. The relatively recent HMRC review of its guidance has taken into account things like the prevalence of homeworking (which has increased very significantly since the guidance was first published nearly 20 years ago). The issue is now whether the journey is what is classed as ‘ordinary commuting’ (and you can’t turn an ordinary commuting journey into business travel merely by arranging a business appointment on the way!). However, the key is whether or not location C can be classed as a ‘temporary workplace’, and generally it will be, even if visited regularly, as long as each visit is self-contained and the purpose of each visit (considered ‘alone’ is temporary). The same would also be true for someone who at intervals visited a different location (each time for a set purpose) but not for example a non-executive director who travelled to London periodically for meetings, if that was virtually his only work for the company (40% rule, see above).
Travel from home to a temporary workplace is generally tax-deductible.
Do let me know if you’ve come across instances where travel expenses have been allowed or dis-allowed as exceptions to the general rules.