Your company pays for an employee’s business trip which lasts a few weeks. The employee uses his downtime to make sightseeing trips. Does this private purpose mean that your company has to treat any part of the expense as taxable?

Expenses reporting requirements

Since 2016 employers can pay or reimburse a director’s or employee’s job expenses, including travel and accommodation costs, without the need to report the details to HMRC. This rule only applies if the expenses would be tax deductible had the director or employee personally incurred them and not been reimbursed. The responsibility for deciding if this condition is met falls on the employer. HMRC provides guidance but it’s not clear about expenses where they partly relate to business travel etc. and partly to private.

Identify separate expenses

Unlike other types of job expense there’s no requirement for the exemption to apply that travel etc. costs be “wholly, exclusively and necessarily” incurred by an employee in doing their job. Instead, an expense need only be:

  • necessary for the worker to do their job; and
  • the employee must be obliged to incur it.

The important distinction between the general expenses rules and those for travel etc. is that the latter allows an expense to be divided between exempt and non-exempt elements.

Example. Andy visits a French client in May 2023. He spends his weekend off in the middle of his business trip sightseeing in Paris. The flights cost his employer £380 and the hotel £1,600 for two weeks. Andy also spent £40 per day on meals plus £500 for taxis to and from the airport, the hotel and the various job sites. Any expenses incurred specifically for Andy’s sightseeing trip to Paris, e.g. his £40 per day subsistence and any travel costs met by his employer are not tax exempt and should be reported as taxable.

Tip. Had Andy not spent time sightseeing the subsistence costs for those days would have been exempt expenses. Although they were non-working days they would have been just part of the overall subsistence expenses for the business trip.

Composite expenses

Our example looks at the position where expenses can be clearly identified as having either a business or private purpose. However, because of Andy’s sightseeing trip to Paris, the cost of the fights to and from France and the hotel etc. while there, serve both business and private purposes. It would seem unreasonable to treat these as non-exempt expenses, so how should Andy’s employer proceed?

Apply the conditions strictly

Andy’s employer simply needs to consider the rules for travel etc. carefully; were the expenses necessary for the employee to do their job and was the employee obliged to incur the expense had their employer not paid it? The answer is “yes” to both and so the whole cost is an exempt expense. The private use of expenses resulting from Andy’s sightseeing isn’t relevant in answering the questions.

Any element of an expense that can be identified as not necessary for the employee to do their job and which they weren’t obliged to pay because of their employment is taxable earnings. However, a business expense which the employee derives personal benefit from is wholly exempt from tax.

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