23 Oct Can HMRC dictate where you stay while on business
HMRC has started enquiries into some of the travel and subsistence costs you’d normally reimburse to your employees. It says they’re excessive and are therefore a taxable perk. Can this be right?
Since 6 April 2016 an employer can treat business expenses it reimburses to employees (and directors) as exempt from tax and NI. Previously these were taxable, but when for business purposes, the employee could claim a deduction to cancel out any tax liability.
Tax Tip – an expense must be “wholly, exclusively and necessarily” incurred in the course of doing their job to be treated as a tax and NI exempt reimbursement.
Two reasons for an expense means no tax deduction
When a business expense has more than one purpose, then by definition it cannot meet the “wholly and exclusively” test and is therefore both taxable and liable to NI. What’s more, since 6 April 2016 the onus is on employers to decide when to apply PAYE tax and NI to reimbursed expenses.
Tax Trap – some tax inspectors argue that where business travel, subsistence or accommodation is more luxurious than it needs to be, HMRC has the right to treat the expense as a personal reward to the employee or director. It takes the view that a personal reward is a secondary purpose for the payment and therefore the wholly and exclusively test must fail making the whole expense a taxable perk.
Decisions for the employer
Perks provided to an employee or director count as part of the salary package, which of course is a tax-deductible cost for your company. The company’s only tax problem is deciding if it should deduct PAYE and NI when it reimburses an expense or declare it as a perk on a P11D after the end of the tax year.
Is there a personal benefit?
If an employee or director derives personal advantage through their job, that’s not automatically taxable as a perk. Sometimes there will be complementary benefits such as food, drink, activities, newspapers, etc. Case law has shown that where these benefits cannot be separated from the cost of the hotel accommodation because the hotel invoiced them as a single charge, there may be no taxable perk.
Tax Trap – if your company pays an additional amount for extras (say for a round of golf on the hotel course) this cost will be a taxable perk. It must be treated as part of the usual extras offered and not itemised on the bill to escape a tax charge.
Tax Tip – if the main purpose of staying away is business, then the cost of any extras included with the accommodation (say gym membership, food and drink) won’t be taxable or liable to NI. HMRC cannot dictate the quality of the hotel etc. you stay in however we do recommend taking a reasonable approach.
HMRC guidance for its inspectors confirms this view, so when an inspector challenges your treatment of reimbursed expenses for a five-star hotel, respectfully point them in the direction of the HMRC employment income manual.
HMRC can’t charge employees for a perk just because your company chooses to put them up in high quality accommodation while on business. Nor can it treat extras such as gym membership included in the hotel price as a perk. However, you would be wise to keep costs to a reasonable level to avoid unnecessary attention from HMRC.