Subsistence expenses: A guide to the rules

The government website sets out the essential requirements for complying with HMRC’s rules on subsistence expenses.

As an employer paying your employees’ travel costs, you have certain tax, National Insurance and reporting obligations. This includes costs for:

• providing travel

• reimbursing travel

• accommodation, if your employee needs to stay away overnight

• meals and other ‘subsistence expenses’ while travelling

Subsistence include meals and any other necessary costs of travelling, for example, parking charges, tolls, congestion charges or business phone calls.

Business travel

You must report your employees’ travel expenses to HMRC, unless they are exempt. You may have to deduct or pay tax and National Insurance on it.

Some business travel expenses are covered by exemptions. This means you will not have to include them in your end-of-year reports. If you do not have an exemption, you must report the cost on form P11D. You do not have to deduct or pay any tax or National Insurance.

If you reimburse your employee with more than the necessary costs of their business travel, the extra amount counts as earnings, so you must:

• add it to your employee’s other earnings

• deduct and pay PAYE tax and Class 1 National Insurance through payroll

If you’ve agreed with HMRC that this will be a scale rate payment, you will not need to report it.

Related:  VAT on business entertainment explained

Private travel

All non-business travel is counted as private. This includes the journey between an employee’s home and permanent workplace.

If, you arrange the transport and pay for it, you must:

• report the cost on form P11D

• pay Class 1A National Insurance on the value of the benefit

If your employee arranges transport and you pay the supplier directly, you must:

• report the cost on form P11D

• add the cost of the transport to the employee’s other earnings and deduct and pay Class 1 National Insurance (but not PAYE tax) through payroll

If your employee arranges and pays for the transport, and you reimburse them, the money you pay them counts as earnings, so you must:

• add it to your employee’s other earnings

• deduct and pay PAYE tax and Class 1 National Insurance through payroll

Exemptions

You’ll be exempt from reporting or paying anything if the cost is for:

• a works bus service

• an employee with a disability (but only in certain circumstances)

• a taxi home after occasional and irregular late-night working

• a taxi home if a car-sharing system is temporarily unavailable

• bicycles or cycle safety equipment

• travelling to work because public transport has been disrupted by industrial action.

Those are HMRC’s rules and guidelines as set out on the website. However, there are many circumstances that may affect your ability to claim an allowance or mean that you have to pay tax or National Insurance on the expenses.

In this guide, we set out our understanding of the rules and their interpretation. However, this is an area that can be complex and it may be important to take professional advice to ensure you comply with HMRC’s rules.

Qualifying business travel

To qualify for tax relief, expenses for business travel must be incurred wholly, exclusively and necessarily for your business. Two scenarios meet that definition:

• Your employee travels from their regular place of work, generally your office, to another location to take part in a meeting or carry out essential duties.

• Your employee travels from home to a temporary workplace for a limited period.

However, travel to the temporary workplace must involve a longer journey than the employee’s ‘regular commute’ from home to your office. Where the distance is 10 miles to either the main office or the temporary workplace, for example, no claim is possible.

Related: How to calculate R&D tax relief for SMEs

Employees working from home

The situation has become more complicated because of the dramatic rise in working from home following the pandemic. In many cases, employees may treat their home as the permanent place of work. In that case:

• A journey to the office for a meeting may not count as essential business travel.

• A journey to a temporary location for a specific business purpose would qualify as business travel.

Employees travelling as part of the job

Some jobs may involve regular travel from the office to other locations and claims need to be carefully considered.

A sales representative or service engineer, for example, will probably travel to other locations to carry out their work on a daily basis. They may be based at your office or work from home.  HMRC describe this as ‘travelling on work’ rather than ‘travelling to work’ and allow claims because business travel is an integral part of the job.

The situation is different for someone who travels regularly to other locations, but not on a daily basis as an integral part of their job. An area manager, for example, may visit other branches of your business several days a week as well as spending time at the main office. The journey from home to the main office would not qualify as business travel, but any journey from home or the main office to another branch would qualify.

Employees working on multiple sites

An employee who has no permanent workplace, but works on a number of different sites, is classed by HMRC as a ‘site-based employee’.  Examples include consultants, inspectors , construction workers or caretakers responsible for a number of different sites. You can reimburse employees and claim tax relief for business travel, provided the time spent at each site is less than two years.

Read More: New VAT Reverse Charge For Construction Sector

Employees on longer-term postings to other sites

If an employee has to work on another site for an extended period, the other site is regarded as a temporary workplace and travel to that site qualifies as business travel. Generally, qualifying travel covers a period up to 24 months at the temporary workplace. If the situation goes beyond 24 months, the employee must spend at least 40 percent of their time at the site to qualify.

Making a qualifying subsistence expenses payment

When you are satisfied that any business travel related expenditure incurred by an employee meets HMRC’s qualifying criteria, you can reimburse the employee and claim tax relief on the expenditure.

To simplify the process, HMRC publishes a set of ‘scale rate payments’ :

Breakfast rate  (£5)

The rate may be paid when an employee leaves home earlier than usual and before 6am and incurs a cost on breakfast taken away from home after the qualifying journey has started. If an employee usually leaves before 6am the breakfast rate does not apply.

Late evening meal rate (£15)

The rate may be paid where the employee has to work later than usual, finishes work after 8pm having worked their normal day and has to buy a meal before the qualifying journey ends which they would usually have at home.

One meal (5-hour) rate £5)

The rate may be paid where the employee has been undertaking qualifying travel for a period of at least 5 hours and has incurred the cost of a meal.

Two meal (10-hour) rate (£10)

The rate may be paid where the employee has been undertaking qualifying travel for a period of at least 10 hours and has incurred the cost of a meal or meals.

Scale rate payments

To make scale rate payments, you must have an agreed arrangement with HMRC. The published rates are the maximum amount you can pay without tax implications. If you pay a higher rate, the whole of the payment may be subject to tax and National Insurance.

Your employees must actually incur the costs and should keep receipts to validate their claims.

Travel costs for journeys in an employee’s private vehicle can be reimbursed on a cost per mile basis. HMRC publishes Approved Mileage Allowance Payments which means there are no tax or National Insurance implications. The current rates for private cars are:

• 45 pence per mile for the first 10,000 qualifying miles

• 25 pence per mile for subsequent qualifying miles.

You can also reimburse employees for associated costs such as parking, hotel accommodation and telephone charges, as well as travel costs on public transport.

Support from Accounts and Legal

This is a brief outline of the rules on paying subsistence expenses. If you would like professional advice on any aspect of subsistence expenses, or would like confirmation that you are complying with HMRC’s rules, our team of experienced tax accountants will be glad to help.

To find out more, please contact us on 0207 043 4000 or info@accountsandlegal.co.uk.

You can also get an instant online accountancy quote through clicking the link.