HMRC’s new guidance on business travel
Business travel expenses which you pay or reimburse to your employees are now exempt from tax and NI, as long as HMRC’s conditions are met. How can you make sure you are meeting them?
Following changes in the rules which took effect on 6 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 6 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 records 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 NI.
Does it qualify?
Some types of expense 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 NI free without a worry. However, other expenses are less clear cut.
Necessarily incurred in the pursuit of the business
The general rule is that an expense is tax deductible, and therefore can be reimbursed or paid for without applying PAYE tax or NI, if it’s incurred “necessarily in the performance of the duties” of the employee’s job. Direct job expenses (such as in our example above) 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 NI.
HMRC has revamped its guide to employee travel expenses, (Booklet 490) to cover the new rules which you can download from GOV.UK
It includes many examples which will help you decide if an expense is exempt.
While HMRC’s guide covers common situations, it is not comprehensive. As explained above, if you don’t make the right decision HMRC can ask you to foot the tax and NI that it thinks should have been deducted when you paid the employee.
The good news is that the new rules protect you 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.
To be exempt an expense must be incurred “necessarily” for the purpose of the employee’s job. Use HMRC’s revised guide to travel expenses (Booklet 490) to help you decide if the exemption applies. As long as you can show you followed its advice you can’t be held liable for getting it wrong.