Travel and subsistence – who’s missing out?

“Travel and subsistence” is HMRC shorthand for the process by which a business pays its directors and employees when they have to travel away from the normal workplace to do their job.  This could be to see new customers, attend a conference or carry out a short-term assignment at the customer’s premises.

A simple enough basic concept but one surrounded by intricate tax rules that determine whether or not those reimbursed expenses are eligible for tax relief or taxable on the employee.

Sooner or later – say every 5 years – you will be on the receiving end of a PAYE review by HMRC inspectors and that’s when you will find out whether or not you have been applying all the rules accurately.  For any errors, HMRC will go back 6 years to calculate any tax underpaid and may add interest and penalties that could more than double that amount.  The worst-case scenario is a prosecution.

Don’t assume your accountant’s annual preparation of the accounts will have uncovered any instances of non-compliance.  The diligent ones may spot some of them but you are paying him to produce your accounts, not to perform an in-depth review of your travel and subsistence policies.

So what are these “intricate rules” and what are the main traps to watch out for?  Here are a few tips:

  • Wholly and exclusively

Is the cost wholly and exclusively for the purposes of travel and subsistence for your business? This is HMRC’s key test.  Any expenditure has to satisfy both tests before giving tax relief.  This is the reason why the cost of commuting from home to place of work fails the “exclusively” test – there is both a business and personal element to those travel costs.

  • Incidental costs

Some costs that are incidental to a business trip and accommodation are tax deductible (e.g. car parking, tolls).  But some aren’t (e.g. laundry, newspapers).  To avoid endless arguments over trivial amounts, HMRC allow you to pay employees £5 per night away to cover their personal costs.

  • Travel exemptions

The following are exempt from reporting to HMRC where the company pays the costs of:

-       Mileage rates in line with HMRC published rates (45p per mile etc)

-       Irregular taxi journeys

-       Travel to work when public transport is affected by industrial action

  • Permanent place of work

There is no simple definition.  Instead, there are numerous rules and exceptions developed through tax tribunal case law to decide whether the place of work is “permanent” (attended regularly for work purposes) or “temporary” (for a limited period of time or to complete a specific task).  Travel from home to your permanent place of work is not a business expense.

Anything not covered by an exemption such as those above need reporting to HMRC on a P11D by 6 July after the end of the tax year.

Are you confused yet?   And we haven’t yet got as far as considering the implications of:

-       Paying mileage rates higher than HMRC’s published rates

-       Employee or employer payment of season tickets

-       Interaction with salary sacrifice schemes

-       Special rules for contractors

When to report (P11D), claim (by the employee) or deduct (tax relief for the employer) is a jungle of rules and exceptions.  HMRC know all the rules – and make up their own interpretation of the grey areas.  Get your travel and subsistence rules checked out by your accountant before HMRC turn up or face the consequences.

Your choice.