Regardless of the sector or industry, almost every business will incur expenditure on entertaining staff and clients as well as business travel – from employees working from home, in a different office, clients’ premises to simply picking up supplies, trips to a post office or delivering goods for example.
Businesses will generally have an expense policy (hopefully written, but on occasion it will be more informal) whereby expenses that will be met/ reimbursed by the employer will be detailed together with the mechanism for making an expense claim.
Despite having these procedures in place, we know that businesses are often not getting the tax treatment/ reporting of some common expense payments right. The main reason for errors is that the tax treatment depends on so many variable factors, many of which are not obvious when an expense claim is submitted, for example.
Whether travel expenses can be paid tax free depends on numerous factors such as:
– Is the employee required to go to that location (or are they choosing to do so)
– Could it be regarded as a permanent workplace – this in turn can depend on how frequently they attend the location/ what duties they are carrying on there, the length of their service, the employee’s employment contract etc
– Have detailed records been kept of where the journey was to/ from, and the purpose of the journey
Distinguishing between staff entertaining, business entertaining and subsistence is another area that can cause confusion as to whether or not it is taxable and how to report it.
We have considered these areas in more detail in the attached links.
| Mileage | Subsistence | Staff /Business Entertaining |
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Travel and Mileage
We all know that you can reimburse your employee for necessary business mileage at rate of 45p per mile for travel in their own car (first 10,000 miles) and 25p per mile thereafter. This is on the basis that the employee is obliged to incur the cost to be able to carry out their job.
Any reimbursement for “ordinary commuting” such as home to work travel will be fully taxable/ NIC.
Travel expenses (including the above mileage payments) are only allowable for tax purposes ( can be paid tax free) if:
- You have to make the journeys in the performance of the duties of your employment – ie delivery driver (or)
- They are journeys which you make to or from a place you have to attend in the performance of your duties, which can include trips from your office or other work location to visit a customer or other ‘temporary’ workplace. This rule can also include travel directly from your home to visit a customer or to another ‘temporary’ workplace.
Temporary Workplace
A temporary workplace is somewhere you would attend irregularly or for a limited period of time. For example, if you normally worked in Belfast, but your employer required you to work from a store in Lurgan for a year, then that store in Lurgan would be a temporary workplace.
However a workplace will not be “temporary” if you attend it for a period of continuous work lasting more than 24 months. A period of continuous work is a period over which the duties of the employment are performed to a significant extent at that workplace. HMRC considers the duties to be performed to a significant extent if the employee spends 40% or more of their time at that place.
So where an employee spends less than 40% of their time at a temporary workplace, they do not need to consider the 24 month rule.
Substantially the same journey
Ordinary commuting is travel between your home and a permanent workplace. Costs of ordinary commuting are not allowable for tax purposes. Ordinary commuting also includes travelling to other places that are not significantly different to ordinary commuting. This means that if an employee, for instance, is required to attend a workplace and the journey to the workplace is substantially the same as that to the usual place of work (and at a similar expense), no tax relief will be allowed.
Site based
There may be different rules for you if you are site-based – for example, if you are employed in the construction industry and you are assigned to work at a particular site for a length of time governed by your employer’s contract there. Normally you would work at that site exclusively for that time and rarely visit the offices of your employer. Provided you are expected to work at that site for less than 24 months, your travelling expenses to and from home may be eligible for tax relief – be careful if you return to the site for any reason over a prolonged period.
Where employees are employed solely to work on one site, that will be their permanent workplace, regardless of how long they work at that location.
Geographically based
If you are an ‘itinerant’ worker (that is one where travelling forms an inherent part of your duties, such as a delivery driver), normally you would be able to claim tax relief for all your costs of travelling – even those from home to work.
One exception to this would be if you were an area-based employee, in other words one whose employment duties are specifically defined by reference to an area (which could be the whole of Northern Ireland). Even if you have to attend different places in the area in the course of your job, the area could be regarded as a permanent workplace and travel costs to and from your home and inside the boundary of that area would not be allowable.
Hopefully, based on the brief examples above, it is clear that in addition to reviewing the expense claim made, it will be important to understand where the employees permanent workplace is, their length of contract, length of working in a particular location etc when considering whether an expense claim should be made tax/ NIC free.
Subsistence
Subsistence (meals / expenses incurred when travelling) is different to staff/ business entertaining and should therefore have a separate nominal code, VAT is recoverable on subsistence and should not be a taxable benefit for the employee.
In the first instance subsistence follows allowable business travel (see Travel/ Mileage), if the journey is deemed to be ordinary commuting as opposed to allowable business travel then any subsistence payments will be subject to tax/ NIC.
Provided the journey is allowable business travel and the employee is able to provide receipts for all expenses incurred, the expenses can be reimbursed tax free.
There is however a “round sum” amount that you can pay employees (as opposed to reimbursing each receipt). The round sum allowance that can be paid for travel within the UK is as follows:
- £5 for travel of 5 hours or more
- £10 for travel of 10 hours or more
- £25 for travel of 15 hours or more, or if the travel is ongoing after 8pm.
Businesses can pay the above set amount for each day of travel and only need to demonstrate that an employee has incurred some kind of expense during their business trip. So, if an employee on a business trip eats three meals, they actually only need to provide proof (a receipt) for one of those meals.
The main stipulations required to claim the above allowance is:
- The cost of food or drink must be incurred after the business trip has started
- The trip must be outwith their usual commute and be done as part of their job.
- The journey must take the employee away from their usual place of work for 5 hours or more.
- The employee must provide a receipt for one meal.
The expense claim must capture all of the above info to allow the subsistence claim to be made tax/NIC free.
Staff / Business Entertaining
It is important to distinguish between staff and business entertaining as for tax purposes they are treated very differently.
Staff entertaining is an allowable deduction for Corporation Tax (CT) purposes, if you are VAT registered you can reclaim the VAT. Business Entertaining is not an allowable deduction for CT and VAT can not be reclaimed.
Any staff entertaining (from a select number of employees having lunch bought for them) to social functions and parties is a taxable benefit for the employees unless it falls under an exemption for Annual Events.
Where staff entertaining is limited to one or more Annual Event (eg Christmas party / Summer barbeque), is open to all employees and costs less than £150 per head, it is not taxable, all other staff entertaining is.
Staff entertaining can include working lunches, whether at a restaurant or on the employer’s premises – the only meals/ beverages that are not seen as a benefit for the employees are those made available to all staff on the employer’s premises (this typically covers tea/coffee/kitchen supplies), when any staff are excluded it will be a taxable benefit for the staff that do receive the hospitality/lunch.
Staff entertaining is generally carried out to boost morale/ the team/ reward for a period of hard work and therefore not something that most employees will expect to pay tax on.
Rather than declare the cost of the staff entertaining on the employee’s P11d, the alternative is for the employer to pay the tax / NIC on the employee’s behalf. The employer can do this by including the expense in their Pay as Your Earn Settlement Agreement (PSA), whereby the cost of the entertaining is deemed to be the net benefit, which is then grossed up subject to tax and NIC.
The deadline for applying for a PSA is 5th July following the end of the tax year it applies to.
If you require any assistance with your P11ds or a PSA please get in touch with your usual contact or Angela Keery, Head of Tax E: angelakeery@bakertillymm.co.uk Tel: 028 9032 3466