HM Revenue & Customs new guidance on business travel
Business travel expenses which you pay or reimburse to your employees are now exempt from tax and National Insurance, as long as HM Revenue & Customs conditions are met. What are these and how can you be sure of meeting them?
Somewhat late in the day HM Revenue & Customs has revamped its guide to employee travel expenses to cover new rules which you can download from the GOV.UK website. It includes many examples which will help you decide if an expense is exempt.
Following changes in the rules which took effect on 6th April 2016, qualifying business expenses you reimburse your employees, or meet on their behalf, don’t count as their taxable income and don’t need to be reported to HMRC on form P11D. Expenses qualify for this treatment if, had the employee borne the cost personally, they would be entitled to claim a tax deduction for it.
It’s now an employer’s problem
Under the old rules once you reported the expense on form P11D to HMRC your job was done. It would consider whether the expense qualified for a tax deduction. However, since 6th April it’s employers who must decide. If you believe an expense would be tax deductible you can reimburse the employee, record the transaction in your business and that’s the end of the matter. But, if it’s not a qualifying expense you must treat it as earnings and deduct PAYE tax and National Insurance.
Does it qualify?
Some types of expenses aren’t a problem - it’s easy to decide if they are tax deductible. For example, where an employee works from home and buys the stationery they need to do their job, you can reimburse them tax and national insurance free without a worry. However, other expenses are less clear cut.
Wholly, exclusively and necessarily
The general rule is that an expense is tax deductible and therefore can be reimbursed or paid for without applying PAYE tax or national insurance, if it’s incurred “wholly, exclusively and necessarily in the performance of the duties” of the employee’s job. Direct job expenses (such as in our example) will meet these conditions. However, business travel and related expenses (subsistence and accommodation) can be tricky and getting it wrong may lead to you bearing the cost of the PAYE tax and national insurance.
While HMRC’s guide covers common situations, in our view it’s not comprehensive enough and is unclear in places. As explained above, if you don’t make the right decision HMRC can ask you to foot the tax and national insurance that it thinks should have been deducted when you paid the employee.
The good news is that the new rules protect you from HMRC to some degree. They say that if you couldn’t reasonably have known an expense didn’t qualify, you won’t be liable for the consequences of getting it wrong. Tip. If in doubt, check HMRC’s guide and cross reference the relevant paragraph number to your employee’s expenses claim. That will show that you’ve taken reasonable steps in deciding that the expense qualified as exempt.