Following a PAYE compliance visit, a tax inspector has challenged various expenses claimed by the company’s directors when staying away on business. He says they are excessive and so not fully tax allowable. How should you respond?
Job expenses
As you probably know, a payment for or reimbursement of job expenses by an employer to its employees and directors is exempt from PAYE tax and NI. There are various tax rules for deciding if the exemption applies depending on the type of expense. Job-related travel has its own set of rules. These say the exemption applies to either the travel expenses relating to a journey:
- made in the course of doing a job, e.g. a sales director whose role involves visiting customers etc.; or
- for a temporary purpose required by a job, e.g. a director of a building firm visiting a site to check on progress.
Tip. Travel expenses refer to not just the cost of getting from A to B but all associated expenses such as hotel bills, subsistence, etc.
Employer’s tax position
Whether expenses are exempt or taxable on the director or employee doesn’t affect the business’s right to deduct the cost when working out its taxable profits or losses. However, the bad news is that if the expense is not exempt, the employer is liable to Class 1 or Class 1A NI (at 13.8% for 2024/25 and 15% for 2025/26 and later years).
Luxury v practicality
Tax inspectors sometimes argue that if travel costs are more luxurious than they need to be, HMRC has the right to treat the expense as a reward for the employee or director and therefore not covered by the exemption. As a result, the expense, or part of it, would be taxable and liable to NI as earnings or a benefit in kind.
Taxable benefit
As long as the purpose of the travel and associated expenses is for business, the cost is not relevant to whether it’s exempt. HMRC can’t dictate the quality of the hotel etc. you stay in. That said, a reasonable approach is advisable to prevent arguments with HMRC.
Tip. It’s entirely acceptable for directors and senior employees to use more expensive means of travel and accommodation than junior staff. This doesn’t effect the tax exemption. For example, it’s fine for your firm’s rules to allow directors and managers to travel first class while other employees are limited to standard travel. The same principle applies to accommodation and meals taken in the course of business journeys.
HMRC’s guidance
There’s a simple way to respond to HMRC in the event that a tax inspector challenges the level of expenses paid or reimbursed to one of your firm’s directors or employees; direct them to its internal guidance. This confirms our comments and says “The tests that apply to travel expenses relate to the nature of the expense and not to the amount.”
The cost of business travel is not a factor in deciding whether expenses paid for or reimbursed to a director (or employee) are exempt from tax and NI. Equally it doesn’t prevent your entitlement to a deduction for the expenses from your profits. If challenged, point the tax inspector to HMRC’s internal guidance which confirms that cost is not a factor in determining tax treatment for genuine business travel.
The next step
HMRC’s internal guidance on travel expenses
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.