There are several rules on what constitutes an incidental overnight expense. This article provides an overview of these rules and how it affects your business.
General Rules For Employment Expenses
For income tax law, a director or employee is generally taxed on the full amount of earnings received. This typically includes reimbursements to expenses they may have.
The employee may get a deduction from those earnings under Section 336 ITEPA 2003 for qualifying expenses. This would mean the level of income is reduced by the qualifying expenditure in calculating the tax due.
To qualify under Section 336, the expenditure needs to be incurred wholly, exclusively and necessarily in the performance of the duties of the employment.
Traveling expenses are handled differently. There is a deduction under Section 337 or 338 ITEPA 2003 for the cost of journeys. To qualify:
- An employee has to make in the performance of the duties of the employment.
- To a workplace an employee has to attend to carry out the duties of the employment, but not if the journey is ordinary commuting or private travel.
Where an expense is paid or reimbursed by an employer, and would be fully deductible, an exemption from charge to tax means that the payment need not be reported and employees will not need to make a claim for relief.
Deductible subsistence expenses
The expenses rule and the exemption for paid expenses which applies to travel costs also covers related subsistence costs. This type of expenditure qualifies for an exemption or a deduction where it is part of the cost of travel necessarily incurred in the performance of the duties, or for necessary attendance at a temporary workplace.
In general, payments made by an employer to an employee’s accommodation and subsistence and subsistence when staying from home overnight on business are not taxed.
Allowable expenses can include:
- The cost of a meal
- The reasonable cost of refreshments (both alcoholic and non-alcoholic) with a meal
- Refreshments such as tea, coffee or soft drinks taken between meals
Incidental overnight expenses
Employees staying away from home overnight on business often incur additional expenses of a personal nature. This could include newspapers, laundry and home phone calls.
Even though this expenditure has occurred as a consequence of working away from home, it is not incurred necessarily not in the performance of the employee’s duties. Under the expenses rules, this type of expenditure would not be allowable as a deduction and would not be covered by the exemption.
Types of Payments
The exemption covers all possible ways in which employers could pay these incidental overnight expenses including:
- Payment by non-cash vouchers
- Expenses paid by the employee by means of a credit card in the employer’s name
- Benefits in kind, e.g where the employer arranges directly with a hotel to pay the bill
- Cash payments
Tax Free Limited
The maximum amounts of incidental overnight expenses an employer may pay tax-free are:
- £5 per night for overnight stays anywhere in the UK
- £10 per night for overnight stays anywhere outside of the UK
In calculating the total amount of expenditure any VAT paid must be included.
If the employer exceeds these limited, the whole of the payment becomes taxable not just the excess.
Employee Repays Excess Over Limit
The special exemption for incidental overnight expenses is designed to reduce the burden on employers of identifying and reporting to HMRC what would otherwise be taxable expenses. There is no relief for expenses which are not reimbursed by the employer.
National Insurance Contributions
National insurance contributions are not payable on any payments of incidental overnight expenses for the income tax exemption.
By Mark Lawson
