Employers that use HMRC’s benchmark scale rates as the basis for reimbursing employees’ subsistence expenses attributable to qualifying travel in the UK, have historically been required to operate a system to check employees’ receipts to ensure that the employees are incurring and paying qualifying expenses.
As many employers originally started to use these scale rates to reduce administration, the realisation that there is an obligation to operate a checking system to check that qualifying expenditure has been incurred is often a surprise, and for many employers this has undermined the purpose of using the scale rate in the first place.
What is changing?
The good news is that, from 6 April 2019, the requirement to check that the employee has incurred qualifying expenditure when using the HMRC benchmark scale rates for subsistence is being abolished and, from that date, employers will only have to ensure that employees are undertaking qualifying travel.
Furthermore, from 6 April 2019 the existing HMRC concessionary travel and subsistence scale rates for employees undertaking qualifying travel overseas will be placed on a statutory basis. Again, employers that use these new statutory overseas scale rates will only be asked to ensure that employees are undertaking qualifying travel and will not be required to check that qualifying expenditure has been incurred.
It should, however, be noted that there will be a continuing obligation for employers to operate a checking system, including checking that employees have incurred and are paying qualifying expenditure, where bespoke scale rate subsistence payments are made. These are, of course, also subject to obtaining an approval notice from HMRC.
Are there complexities or pitfalls?
The changes highlighted above could make the use of these HMRC benchmark scale rates more attractive for employers, particularly for those with large groups of employees regularly undertaking qualifying travel overseas and those with large mobile workforces in the UK.
Before the HMRC benchmark scale rates are used, it is vital that employers consider the potential complexities and pitfalls which could arise. Examples of common problems which can lead to tax and National Insurance contributions (NIC) being due on benchmark scale rate payments include (but are not limited to) the following.
- Procedures must be robust enough to ensure that the scale rate is only paid when employees are undertaking qualifying travel. The travel must be in the performance of an employee’s duties or to a temporary place of work, and the employee should be absent from their normal place of work or home for sufficient time to meet the criteria for the scale rate to be paid tax and NIC free. We regularly see scale rates being paid where these conditions are not met, including payment for days of absence due to sickness and annual leave.
- Where the overseas subsistence rates are used, employers can use the specified individual meal rates or the hourly residual subsistence rates. Care needs to be taken with the hourly residual subsistence rates to ensure that the qualifying conditions are met and the appropriate tax and NIC free rate is not exceeded. For example, a ’24 hour’ residual subsistence rate can be paid for each complete period of 24 hours, starting from the time when the employee arrives at the overseas destination (for example the airport) and ending when they leave the country in question. But for any period (or residual period) of less than 24 hours a lower hourly rate may need to be paid. We often see the 24 hour rate being paid for periods of less than 24 hours.
- Where the overseas travel and subsistence rates are paid for more substantial periods of work overseas, the employee may, for cost reasons, stay in a residential property or a serviced flat with cooking and/or laundry facilities rather than a hotel. In these circumstances the scale rate which can be paid tax and NIC free is reduced and the reduction to be applied depends on how long the employee is staying in the property for. A similar reduction applies if the employee stays as a guest of a private individual overseas. This requirement to limit the tax and NIC free scale rate is often overlooked.
Should you consider using these scale rates rather than reimbursing actual costs?
Whilst the new rules from 6 April 2019 will make the use of HMRC scale rates attractive for many employers, they will not be appropriate for everyone. For example, before using these scale rates employers will need to consider what impact this will have on overall costs (ie will total subsistence costs increase as compared with actual qualifying expenditure?), how this will affect and change policies and procedures, and whether their use will have the effect of easing or adding to the administrative burden (for example, as a result of the requirement to ensure that the qualifying conditions have been met for the benchmark scale rates to apply).
Does this administrative easement apply when reimbursing actual subsistence expenses?
No, it does not. Where employers do not use the HMRC benchmark scale rates and reimburse the actual cost of travel and subsistence instead, care must be taken to ensure compliance from a tax and NIC perspective. For such expenses not to be taxable and liable to NIC, the employee must provide evidence of their costs and that they are necessarily incurred, and the expenses must be incurred on travelling in the performance of the duties of employment or attributable to an employee’s attendance at a temporary workplace. The rules here can be very difficult to navigate and, as such, checking compliance is high on HMRC’s agenda.
Examples of common mistakes which can lead to unexpected tax and NIC liabilities where employers reimburse actual travel and subsistence expenses include (but are not limited to):
- employees’ ordinary commuting costs to a permanent workplace being reimbursed;
- complications where the employee’s home is incorrectly regarded as a permanent workplace for tax purposes;
- overnight accommodation attributable to employees’ attendance at their permanent workplace being reimbursed, often when the employee is required to work late;
- the full cost of travel cards and card top ups being reimbursed, even though the cost does not wholly relate to qualifying travel; and
- confusion about the definition of subsistence, staff entertainment and business entertainment, particularly in respect of staff lunches, where business is discussed, close to employees’ permanent places of work.