You recently opened a new branch of your business in another part of the country. You’ve rented a flat in the area for your use and that of youremployees when visiting the branch. What are the tax consequences?
Business expense
An expense incurred by a business which directly impacts its employees (including directors) has tax consequences for both. This is especially true for an expense that involves work-related travel, e.g. rail etc. fares, mileage allowances and accommodation costs. The business must decide whether it’s entitled to a tax deduction for the whole expense and if there’s a taxable benefit for the employee(s) for whom the expense was incurred.
Business’s tax deduction
Unless specifically excluded, such as business entertainment costs, expenses are tax deductible from a business’s profits where they are incurred “wholly and exclusively” for the purpose of its trade.
Tip. In practice HMRC will not refuse a tax deduction even if some private benefit is derived from the expense as long as it was incidental to the reason for incurring the cost.
Example. A business rents accommodation solely for the purpose of providing somewhere to stay for employees while working at a branch office. When staying in the accommodation some employees do some sightseeing in the local area. This does not prevent the employer from being entitled to a tax deduction for the expense.
What’s the employee’s tax position?
This a tricker issue. You must decide whether an employee who stays at the flat derives a taxable benefit from doing so. The following example should help you decide.
Example. Neil’s normal place of work is at his company’s head office but he’s been asked to spend five working days at a branch office located about 150 miles away. He stays in a company-owned flat near the branch for the week he works there. With permission from his employer Neil extends his stay by three days to visit some friends in the area. Consequently, 3/8ths of his stay was for non-incidental private use of the accommodation. Neil’s employer must calculate using any fair and reasonable method the accommodation costs it incurs, e.g. rent, council tax, energy, attributable to Neil’s extended stay and treat that amount as a taxable benefit in kind.
Tip. If Neil’s working week is Monday to Friday but his employer asked him to work at the branch office Wednesday to the following Tuesday (with the weekend off as usual), HMRC will accept that there was no benefit in kind even if Neil spent the weekend sightseeing or on any other private activity.
Business deductions again
When accommodation is empty there’s neither a business nor a non-business use. The good news is that HMRC accepts that no reduction in the tax- deductible cost of accommodation is required. Plus, costs for periods of occupation which count as a taxable benefit for an employee are also tax deductible. In summary, unless there’s a private reason for renting accommodation, our subscriber can claim a tax deduction for the whole cost of providing the flat, regardless of any private use by her employees.
As the sole reason for renting the flat was for the purpose of the business, any incidental private use by an employee doesn’t count as a taxable benefit. However, the employee does receive a taxable benefit if they stay in the property solely for private purposes. Either way you are entitled to a tax deduction of the rental costs from your profits.
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.