Tax relief for travel and subsistence is an area of tax compliance which seems easy, yet it can be extremely complex. This is highlighted by HMRC’s guidance booklet running to around 80 pages.
This is an area where we see frequent tax compliance problems, complications are particularly prevalent in highly mobile workforces where the tax rules fail to meet current working patterns, making it more difficult for employers to comply.
Recent activity from HMRC has shown us that often problems are encountered when employees have more than one workplace or work from home.
It’s very important that those responsible for checking employee expenses claims (to ensure the claims meet the available tax exemptions) can apply the rules correctly. There are some basic terms employers need to understand. These are described below.
What is a permanent workplace?
A permanent workplace is somewhere the employee works regularly to perform their duties of employment. Problems may arise if a workplace is not properly identified as a permanent workplace. It is also crucial to understand that an employee can have more than one permanent workplace at the same time.
Travel between home and a permanent workplace is treated as private travel (“ordinary commuting”) rather than business travel. This will often be the case even if an employee is contracted to work from home.
If an employer reimburses an employee for such travel, the reimbursement is taxable to the employee. The employer is, however, liable for the tax and any associated penalties if the benefit is not properly reported to HMRC.
What is a temporary workplace?
This is a place an employee goes to perform a “task of limited duration” or for “a temporary purpose”.
When deciding whether a place is a temporary workplace, you also need to consider the ‘24-month/40%’ rule. This rule can treat a location that would otherwise be a ‘temporary workplaces’ as a ‘permanent workplace’ if the employee spends, or intends to spend, a significant amount of time at a particular place over an extended period.
Many employers struggle to apply these complex rules properly which can result in expensive PAYE failures.
What is ordinary commuting?
Generally, this is the travel between home and a permanent workplace. Amounts paid or reimbursed by the employer for such travel will normally be taxable.
To complicate matters, however, this principle also applies where the travel is between two places and the journey is substantially the same as the ordinary commute. This means that where there is a change of workplace, but the new destination does not significantly alter the journey to work, both workplaces could be treated as a single workplace for tax purposes.
Working from home
HMRC’s guidance says: “where employees work at home, they usually do so because it is convenient rather than because the nature of the job actually requires them to carry out the duties of their employment there”.
This succinctly sets out HMRC’s starting position as far as home working and travel expenses is concerned. The questions you need to ask yourself are, “why is the employee working from home?”. Is it because there is a business requirement for them to work from home? Would any employee performing that role be required to work from home? If not, then it is very likely you will run into problems.
HMRC closely examine the facts and circumstances of those employees based at home and will view travel expenses paid to these employees critically. Problems arise if employees volunteer to work from home some days each week - even where the employer is eg, trying to reduce desk space, HMRC is likely to argue that the original location is still their permanent workplace.
There are other special rules covering areas such as international trips, area-based and depot-based employees, together with emergency call-outs.
What should you, as an employer, do to get it right?
- Ensure you understand the rules when agreeing work patterns with employees, so it is clear which expenses can be claimed and the tax treatment to be applied.
- Make sure you have a periodic sample checking process of actual expenses claimed to spot any patterns that may develop over time.
- Review your business expenses policy to make sure it is clear what can be claimed, perhaps giving some examples based on your knowledge of your workforce.
- Ensure that adequate information is provided when expenses forms are completed, so that the correct tax treatment can be applied.
- Seek specialist tax advice if you are in any doubt about how the rules apply.
How can RSM support you?
- We can help you to understand the rules as they apply to your workforce, identifying any issues that might be likely to arise so that you can fix any processes before HMRC visit.
- We can help you set up your expenses system, draft your expenses policy and update your processes to minimise the complexity and associated administration burdens, while ensuring compliance.
- We can assist with updating your employee benefits reporting processes to ensure they are aligned with the latest rules and HMRC’s interpretations, eg P11Ds, PAYE Settlement Agreements and payrolling of benefits in kind.