Travel & subsistence expenses for limited companies – directors and employees
One of the most troublesome areas for expense claims relates to what company directors and employees can claim as travel and subsistence expenses.
The overriding rule is that you can only claim a deduction for expenses that have been incurred wholly, exclusively and necessarily for your business.
If your employer (or company) makes any payments to you for private travel, whilst they may be able to claim a tax deduction for any costs, they are likely to pick up a National Insurance (NIC) liability and you’ll be taxed on any private travel costs that are reimbursed to you.
You should remember to keep a detailed record of your business mileage and any related expenses so you can support any claim if this is ever queried by HMRC.
What is business travel?
HMRC’s definition of a ‘business journey’ is one which either involves travel:
From one place of work to another
If you’re like a lot of company directors who run their own business you probably have an office or premises which you attend regularly. Occasionally you might make trips from your company premises to another ‘workplace’ - for example you travel directly from the office to visit a customer or supplier.
From home to a temporary workplace or vice versa
Remember trips from your home to the office are business journeys. These journeys are regarded as ‘ordinary commuting’ (see above) and this means that you (or the company) will have to bear the cost of these journeys – even if you’re forced to go in and work at the weekend!
A 'temporary workplace' means that you attend the workplace for a limited duration or temporary purpose.
However, even then some of the travel between a temporary workplace and home may not qualify as a tax deduction if the trip made is substantially similar (i.e. using the same roads, train or bus for most of the journey) to your usual trip to the office.
You therefore cannot set up a temporary base within a similar geographical location to your company’s existing premises (say 10 miles away) and not expect a challenge from HMRC if you claim tax relief on any travel costs to and from your home to this temporary base.
Hopefully we haven’t lost you at this point, so let’s give you some examples so you can see how this works in the real world.
John is an IT manager and usually commutes by car between his home in Preston to his normal place of work in Blackburn. This is a daily round trip of 20 miles. On a particular day he drives from home to his firm’s other offices in Newcastle. This is a total round trip of 274 miles.
John can claim a tax deduction for any costs incurred on this journey which are not reimbursed to him by his employer.
It is of course possible to have more than one permanent workplace which you attend regularly and so are not able to claim travel expenses between them as HMRC will deem this ‘ordinary commuting’.
For example, Alan lives in Taunton and is the area manager for a chain of electrical retail stores and spends 2 days a week at their store in Bristol and 3 days a week at their head office in Bath.
Whilst travel between Bristol and Bath will be an allowable expense, Alan cannot claim tax relief for his journey from home to Bristol or home to Bath and vice versa because HMRC regard this as ‘ordinary commuting’.
Temporary workplace – further rules
Attendance at a workplace is not treated as ‘temporary’ or of ‘limited duration’ if it represents the whole (or virtually the whole) of the period of employment. So for example if you have a 6 month temporary contract you will not be able to claim tax relief for travel expenses incurred travelling to your business premises.
Where you as a director (or employee) are sent to a temporary workplace from your usual base of operations for many months, this new workplace may still be treated as a temporary workplace if either:
a) It is expected to last for less than 2 years
b) If it is a temporary workplace expected to last for more than 2 years and you will be spending less than 40% of your working time at this temporary workplace.
Susie works in Poole. Her employer sends her to Bristol for 1 day a week for 26 months. Even though this is for more than 2 years, Susie should still be able to claim for her travel expenses to Bristol as less than 40% of her time is spent there.
What happens if there is no permanent workplace?
You may not have a permanent or normal place of work and actually work at a number of different places for several days, weeks or even months. The taxman refers to an employee in this situation as a ‘site based employee’ - common examples of these are IT consultants, safety inspectors and relief workers.
If you fall into this category your travel and subsistence can be reimbursed to you by your company tax free (and it obtains a tax deduction for this cost) if the period spent at each site is expected to be, and actually is, less than 2 years.
But be careful, the taxman has rules to prevent you abusing this tax break - you cannot simply take a series of recurring temporary appointments in order to claim the relief.
It may be that travelling is an integral part of your job, a typical example is where you are a travelling salesman and you don’t have an office where you work or are required to report to regularly.
The taxman refers to this as a ‘travelling appointment’ and if you fall into this category you should be able to a tax deduction for all of your business travelling expenses even where the journey starts from home.
This is because the taxman regards you as travelling on your work (instead of travelling to it), from the moment you leave your home.
Home based employees
If you work at home occasionally, or even regularly, this doesn’t always mean that your home can be treated as your place of work - much as you might like to think so!
You must be able to demonstrate that there is an actual requirement for your work to be performed at home rather than elsewhere. If you can show that this is the case, then the cost of any trips between your home and any other workplace for the same employment will be tax deductible.
If you can’t prove this, it might mean that somewhere else (other than home) is your permanent workplace - for example, the office you regularly report to. So any cost of travel between your home and the office would not be tax deductible because it’s treated as ‘ordinary commuting’.
However trips between your home and a temporary workplace (see above) will be allowable.
If you have a permanent base (for example an office) that is separate to where you live then any travel between home and that base is regarded as ordinary commuting and will not be tax deductible.
If you carry out your business from home then you should be able to claim the cost of travelling between your home and where your work is carried out.
If you're an employee or director using your own car for business purposes you can charge the company for the business mileage which you do.
The easiest way to do this is to use HMRC's Approved Mileage Allowance Payments (AMAP) and you can see the up to date rates here.
If you'd like more guidance as to how to apply these rates, have a look at our blog here.
VAT on business mileage
So how do you calculate the fuel element?
Well, your company can use HMRC’s advisory fuel rates which are published here.
If you have a car with a 1500cc petrol engine, the fuel portion of the mileage rate is 13p per mile (as at June 2016).
13p per mile represents the VAT inclusive amount ie 120% (100% plus 20% VAT)
So to work out the VAT included, you need to do the following:
13p ÷ 120 * 20 = 2.2p
So you can claim 2.2p in VAT.
But beware, your company will need to show HMRC on request that it has enough VAT receipts to cover the claim.
So for example, if 1,000 miles is claimed in the VAT period, then you will have claimed £22 in VAT (2.2p x 1,000). The fuel receipts will therefore need to total £130 (the VAT inclusive amount - £22 ÷ 20 *120).
Other travel expenses
In addition to expenses relating to your car running costs, the company can also claim any parking fees, motorway tolls and congestion charges if these relate to business trips. The company can also claim VAT on these expenses as long as they are business related.
The company can also claim bus and train fares incurred by directors or employeess in the course of travelling for business.
Hotels & Subsistence
Any accommodation, food and drink costs you incur whilst you are away from your permanent workplace are tax deductible for the company (though the local takeaway across the road from your company’s premises does not count!).
Make sure your subsistence expenditure is reasonable though, as HMRC may question bills for dinner at The Ivy restaurant washed down with Cristal Champagne.
HMRC have published a list of advisory scale rates which your company can use to make day subsistence payments to you (as their employee). These payments can be made free of tax and national insurance contributions (‘NIC’) when you incur allowable business subsistence expenses. Again your company can claim a tax deduction for this expense.
The rates are as follows:-
Up to £5
Before you get too excited, this only applies to irregular early starters - where an employee leaves home earlier than usual and before 6am. You should ask yourself the question - is breakfast really worth getting up early for?
One meal rate
Up to £5 can be paid where you are away from your home/normal place of work for a period of at least 5 hours.
Two meal rate
Up to £10 can be paid where, you are away from your home/normal place of work for a period of (yes you’ve guessed it) 10 hours.
Late evening meal rate (irregular late finishers only)
A rate of up to £15 can be paid where you have to work later than usual and finish work after 8pm having worked your normal working day and it is necessary to buy a meal which you would usually have at home. Some people might consider working late a small price to pay if their other half lacks culinary skills.
In all of the above cases, you must actually incur a cost on subsistence in order to qualify for these tax breaks.
Your company will need to enter into an agreement with HMRC if it wants to pay an agreed rate without the need to report these expenses (this is known as a ‘dispensation’).
Once this agreement is reached with HMRC it shouldn’t be necessary to produce receipted evidence of costs incurred. It might be possible to agree payments in excess of these benchmark rates but you would need to agree a tailored scale with the taxman.
Additionally your company can pay you incidental overnight expenses (e.g. the cost of telephone calls) tax free:-
Up to £5 per night for overnight stays in the UK
Up to £10 per night for overnight stays outside the UK.
Note: If a payment to a director or employee exceeds these limits, the whole of the payment becomes taxable and not just the excess. So for example a payment of £7 per night for incidental overnight expenses in the UK would be fully taxable.
The limit is also applied to the whole of the period that the employee spends away from home and not to each night separately. So for example if you spent 5 nights away on business in the UK and your company paid you £30 the whole amount would be taxable.
The fact that expenses on specific nights may have been less than £5 is irrelevant and does not exempt the whole payment from tax.
Be careful if you don’t come to an agreement with HMRC over payment of these expenses (and don’t have evidence to support it) - you could end up in hot water with a nasty tax and NIC liability.
If you'd like to see what other expenses you can claim take a look at our blog here.