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The Road to Nowhere: UK Travel and Subsistence Rules
As remote working become more prevalent, the rules about travel expenses look increasingly out of date.
Susan Ball, Partner, Head of Employers Advisory Services 
03/10/2018
Motorway junction

Over recent years, HMRC has enjoyed some success when challenging travel expenses. For example, in 2016 it has managed to remove dispensations and we also saw the introduction of new legislation for employment intermediaries travel and subsistence expenses.

Consequently, the tax authorities have increased their focus on how expenses are taxed under travel and subsistence rules (T&S). In the past, problem areas here have included situations that arise when an employee has a permanent workplace at home but also another elsewhere such as their employer’s headquarters. The issue here is that tax breaks on travel between the two are not always allowed. Instead they depend on the nature and duties of the job concerned.

The nub of the problem is that, even though more employees work remotely or are much more mobile than they used to be, the current T&S rules have not changed substantively since April 1998. But as many jobs are very different to how they were, the current rules often confuse employers - and some of challenges that HMRC has made using them have not been correct.

It was widely hoped back in 2016 when the last review took place that some of these challenges might be addressed. But the fact they were not should come as no real surprise as the 1998 amendment itself aimed to change rules that dated back some 140 years.

While T&S is an area of compliance that seems straightforward on the face of it, it can actually be extremely complex for employers to understand and get right. It is no coincidence that HMRC has issued a guidance booklet totalling 80-odd pages to help explain the rules.

Within the current system, there are two main things to bear in mind relating to travel. The first is that tax relief is provided for “travel in the performance of the duties of the employment”. In other words, relief is given for travel that is an intrinsic part of an employee’s job and may include journeys between two workplaces. This rule is generally well understood by employers and applied correctly in practice.

It is in relation to the second rule, which provides tax relief for necessary journeys to workplaces that employees must attend for work purposes, apart from those amounting to ‘ordinary commuting’, that problems most often arise though.

Basic terms

The key terms needed to understand the rules are summarised below. Note that the rules for subsistence are similar to those for travel. If a business journey is allowable for tax purposes, the subsistence cost generally is too unless there are issues around excessive expenditure, dual-purpose trips, and round sum or benchmark allowances.

Due to the removal of dispensations, UK employers are required to report expenses at the financial year-end on P11D forms, unless they have sufficient information to determine that a deduction under the tax rules is allowed.

Failure to report can incur a penalty of up to £3,000 per form. It could also mean employers are liable for any tax and National Insurance Contributions (NIC) that have been underpaid, plus interest.

Permanent workplace

A ‘permanent workplace’ is considered to be somewhere that an employee works regularly to perform their duties of employment. In most instances, it is clear whether or not somewhere is an employee's permanent workplace and, therefore, whether a journey to it can be deemed ordinary commuting. It is also possible for an employee to have more than one permanent workplace at the same time.

Travel to or from a permanent workplace is treated as private rather than business travel and so tax relief is not due on any related costs that are paid or reimbursed by an individual’s employer. The exception to this rule is if travel takes place between one permanent workplace and another while they perform their duties of employment during the working day, for example.

Temporary workplace

A ‘temporary workplace’ amounts to such if an employee goes there only to perform a task of limited duration or for a temporary purpose. So even if they attend regularly, it will still not be classed as a permanent workplace under those circumstances.

But such distinctions can be confusing – and it is in this area that HMRC is cracking down most. Employers often fail to consider the task involved or the purpose for working at a given location, which is what the legislation requires. The employee’s attendance is not in question. The issue is whether the task itself will be undertaken for a limited duration or whether it is performed for a temporary purpose.

The trouble is that many employers fail to look too deeply at the matter and simply go with the ‘24-month/40%’ rule, which means that all travel is allowable. But it is worth noting that HMRC has asked for contracts, diaries and job descriptions in order to determine if the locations visited meet its ‘temporary workplace’ rules.

Employers often seem to believe that a 'task' amounts to an employee's job taken as a whole. This means it is neither of limited duration nor for a temporary purpose.

It should also be remembered that the word 'task' is not defined in the legislation. As a result, the normal dictionary definition applies. Here a ‘task’ is something specific, for example a piece of work, rather than a group of things to do, which is the nature of a job more generally.

Likewise bear in mind that the 24 month/40% rule treats locations that would otherwise be ‘temporary workplaces’ as ‘permanent workplaces’. It does not apply to somewhere that is not a temporary workplace as it does not meet the definition laid out in the EIM32075 Employment Income Manual.

Ordinary commuting

For most employees, ‘ordinary commuting’ is the journey they make most days between their home and permanent workplace. Benefits would normally be taxable here if the costs of ordinary commuting were paid for or reimbursed by their employer, or if travel facilities were provided.

But for some staff, the situation is more complicated. For example, if the journey to a temporary location is broadly the same as an employee's ordinary commute to their permanent workplace, tax relief would be denied on the basis that the journey is normally treated as private travel.

This rule applies generally if the journey is in the same direction, or on the same route, and amounts to less than 10 miles extra each way than the normal commute. This area is rarely explained in most employers’ travel and expenses policies but is again something that HMRC is increasingly focusing its energy on, particularly in major towns and cities.

Working from home

HMRC often quotes the Kirkwood (Inspector of Taxes) v Evans [2002] EWHC 30 case when looking at a ‘working from home’ situation. It concluded that, although Mr Evans went to the Leeds office for only one day a week, it was a permanent and continuing part of his duties to do so.

The judgement dealt with the situation briefly in a single paragraph, also stating that Evans had conceded the Leeds office was not his temporary workplace, even though the General Commissioners had concluded it was. The judge justified this latter view by saying: “This attendance was both regular and was not ‘for the purpose of performing a task of limited duration or for some other temporary purpose"'.

Perhaps Evans was ill-advised to admit that Leeds was a permanent workplace. It could be argued that he undertook certain specific tasks each time he went there that were of limited duration, namely delivering work he had performed since his last visit, taking new work with him, and downloading information from a database.

On the other hand, HMRC seemed to argue that the word 'task' refers to doing these things each week on a continual basis – even though this definition does not match an example that it formerly provided itself.

Please see HMRC's example: “Bruce normally works in a branch office in Manchester but has to attend the company's headquarters in London for a management meeting once a month. Bruce attends the London headquarters regularly, but it is not his permanent workplace because he attends only for a temporary purpose - each visit is self-contained. His journey from his home to London is not therefore ordinary commuting and he is entitled to relief for the cost of his business travel.”

It is worth noting that HMRC’s guidance says: “Most employers provide all the facilities necessary for work to be carried out at their business premises. So where employees work at home, they usually do so because it is convenient rather than because the nature of the job actually requires them to carry out the duties of their employment there. However, where it is an objective requirement of an employee's duties to carry out substantive duties at the home address, then his or her home is a workplace for tax purposes.”

It continues: “Where ‘home’ is a ‘workplace’, an employee is entitled to relief for journeys he or she has to make between there and a permanent workplace in respect of the same employment because this travel is "in the performance of the duties of the employment. An employee whose home is a workplace is entitled to relief for journeys between there and a temporary workplace in the same way as an employee who does not work at home.” (TB32)

The italicised sentences indicate that travel expenses are allowable, even if an employer's premises act as a permanent workplace.

There are also other special rules to consider on top of the above that cover areas relating to international trips, area-based and depot-based employees together with emergency call-outs.

What should employers do to get it right?

  • Undertake a review of the T&S rules based on knowledge of their own workforces
  • Regularly review patterns of work to ensure it is clear which expenses can be claimed and what tax treatment needs to be applied
  • Ensure that adequate information is provided when expenses forms are completed, so that the correct tax treatment can be applied
  • Seek specialist tax advice if any confusion arises

This article was first published on the website of the Global Payroll Association.

Contact us

Susan Ball
Susan Ball
Partner, Head of Employers Advisory Services
London