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Food for thought

By Andy Vessey


HMRC publish discussion paper on travel and subsistence

In July 2014, HMRC launched the first stage of its review of travel and subsistence expenses which has been followed up by the publication of a discussion paper, 'Travel and subsistence:  discussion paper'. Amongst other things this document suggests the withdrawing of tax relief for daily subsistence as the government considers the current rules to be over generous and outdated.

Abolishing daily subsistence relief would prevent contractors from being able to claim the cost of lunch whilst on a business journey. Such an expense, it is argued, is effectively a private expense. However, overnight subsistence such as the cost of a hotel room, or an evening meal/breakfast whilst staying away from home overnight on a business journey would not be affected.

The paper is borne out of discussions held with stakeholders who contacted HMRC after the review was launched in July of last year and sets out the case for change to the current rules for tax relief on travel and subsistence. Responses to this discussion paper will be used to inform the development of the government's proposals which will be published for wider consultation in due course.

Current rules

The current rules for travel and subsistence have remained substantively unchanged since April 1998. Within the current system there are two main travel rules:

  1. Travel in the performance of the duties of the employment – this rule gives relief for travel that is an intrinsic part of the employee's job. e.g. a lorry driver, travelling salesman or meter reader. This can include journeys between two workplaces and, according to HMRC, is generally well understood and applied correctly by employers.
  2. Necessary journeys to workplaces that an employee has to attend for work, apart from the cost of “ordinary commuting”.

Ordinary commuting is defined as a journey between an employee's home, or somewhere that's not a workplace, and a permanent workplace.

A permanent workplace is defined as as a location that an employee attends regularly and which is not a “temporary workplace”. Several rules then apply to determine whether or not a workplace is a temporary workplace, with the main tests being:

  • Whether the employee is attending the workplace for a limited duration or a “temporary purpose”.
  • Whether an employee performs, or expects to perform their duties to a significant extent at the workplace, ie spending over 40% of their working time there (the 40% rule).
  • Whether the employee attends, or expects to attend, the workplace for more than 24 months (the 24 month rule).

HMRC's guidance, booklet 490, on these tests currently runs to over 70 pages

Why change is necessary

Since the rules last changed, the physical work environment and patterns of working have evolved. Better technology enables people to work flexibly across different locations, at their home and whilst travelling. Many employees do not have a fixed desk at any particular workplace or at a particular geographical location.

In their review of travel and subsistence rules, the Office of Tax Simplification (OTS) found that the current system is reasonably well understood by employers and works for the majority of employees, ie those who attend the same workplace each day and make an occasional business trip. However, they also found that complexities arose for some employees who travel frequently to perform their work duties.

The main issues that the OTS review highlighted were:

  • A lack of understanding over the level of attendance that constitutes 'regular attendance' and how that test fits with the other rules.
  • Confusion around the definitions of permanent and temporary workplaces, particularly as they do not take their everyday meaning.
  • The fact that the '24 month rule' relies on the employee's intention rather than the amount of time actually spent at the location.
  • The fact that the current rules can mean that an employee ends up with more than one permanent workplace.
  • Confusion around whether or not a journey is substantively the same as ordinary commuting or private travel.
  • Confusion around home working.

Reducing complexity

As well as identifying the issues above, employers were also clear that they would value a system that gave them certainty by not being as open to interpretation and therefore disagreement with HMRC, and that ideally the rules would be objective, based on facts that would be immediately apparent to anyone making decisions about the tax treatment.

Based on these insights from employers, although the government agrees that the current rules seem to give the right result for the majority of employees, it nevertheless believes that the rules can be made clearer to cater for those employees where these rules are currently not functioning very well. This would also reduce the need for employers to rely on extensive guidance in order to apply the rules in practice.

Potential ways forward

As the government believes that the current rules work well for most employees they do not intend to change the tax treatment of travel expenses for those employees with fairly straightforward arrangements. Neither will the government change the restrictions of travel and subsistence relief for employees working through employment intermediaries.

It is recognised however that for some employees the current rules do not reflect the modern workplace and can be complicated for employers to apply. The question of whether a journey is business travel or ordinary commuting is complex and the current rules can be significantly improved to make them easier to understand and apply in practice.

Principles and framework

A number of principles have been identified that any new set of rules should try to uphold:

  • that tax relief should continue to be available for business travel, but not for ordinary commuting
  • any tests should be objective and based on measurable facts as far as possible – they should not rely on the intentions of the employee
  • new rules should not be based on the concepts of ‘permanent’ and ‘temporary’ workplaces except and unless these terms carry their everyday meaning
  • employees should not have their journeys to multiple locations or areas which are a significant distance apart all treated as being ‘ordinary commuting
  • relief should not be available for subsistence where this is essentially akin to a private expense
  • any changes should not come at an additional cost to the exchequer

The intention for the proposed new framework would be to broadly allow tax relief for three types of journeys:

  1. journeys made necessarily in the performance of the duties of the employment;
  2. journeys to allow the employee to attend a location where their attendance at that location is a necessary part of their job, and the location is not the employee’s “main base”; and
  3. journeys to the employee’s main base where all bases of the employee are ‘detached duty’ locations (working away from the normal work location).

The intention would be for employees to consider these rules in order; they would not need to consider the later rules if they had already qualified for relief under one of the earlier rules. For example, if an employee is travelling to a location other than their main base, they would not need to consider the ‘detached duty’ rule at all since they would have already qualified relief under the ‘main base’ rule.

Responses to the discussion paper need to be made by 16th December. The full document can be found by clicking HERE

Published October 2015