Incidental overnight expenses (480: Appendix 8)
Find out information about employee incidentals overnight expenses for business travel.
General rule for the treatment of employment expenses
Under general Income Tax law, a director or employee is taxable on the full amount of earnings received and this generally includes reimbursed expenses they may get. The employee may, however, get a deduction from those earnings under Section 336 ITEPA 2003 for qualifying expenses. That’s to say, 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.
For travelling expenses, there’s a deduction under Section 337 or 338 ITEPA 2003 for the cost of journeys:
- an employee has to make in the performance of the duties of the employment, or
- 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
These tests have been interpreted very strictly by the courts over the years.
Sections 337 and 338
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 (see chapter 2).
Deductible subsistence expenses
The expenses rule and the exemption for paid or reimbursed expenses which applies to travel costs also covers related subsistence costs. This type of expenditure qualifies for an exemption or a deduction where it’s 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 by an employer for an employee’s accommodation and subsistence when staying away from home overnight on business are not taxed.
Allowable expenses can include the cost of a meal, the cost of a reasonable level of refreshments (both alcoholic and non-alcoholic) with the meal and 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. Examples include newspapers, laundry and home phone calls.
Section 240
Although the expenditure may arise as a consequence of working away from home, it is not incurred necessarily nor in the performance of the employee’s duties. Under the expenses rules that apply to travel costs this type of expenditure would not be allowable as a deduction and would not be covered by the exemption referred to in chapter 2. If this expenditure was met either wholly or in part by the employer, tax would be due under the general rule for taxing income.
A special exemption provides that employers can pay for incidental overnight expenses relating to a qualifying period up to a tax-free limit, without any tax consequences for the employee.
Qualifying period
A qualifying period for this exemption is a continuous period throughout which an employee has to stay away from home, including at least one overnight stay away from home, and where the expense of travelling qualifies for tax relief under the normal rules.
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, for example, where the employer arranges directly with a hotel to pay the bill
- cash payments, such as allowances or reimbursed expenses
Tax-free limits
The maximum amounts of incidental overnight expenses an employer may pay tax-free are:
- £5 per night for overnight stays anywhere within the UK
- £10 per night for overnight stays outside the UK
In calculating the total amount of expenditure any VAT paid must be included.
If the employer exceeds these limits, the whole of the payment becomes taxable not just the excess.
Employee repays excess over limit
Employers are encouraged to introduce clear policies on the payments of incidental overnight expenses and the refunding of overpaid amounts. Where a policy needing repayment of any amounts in excess of the tax-free limits is in force, an employee has no entitlement to the excess. In these circumstances, the employee would not be taxed on the payment provided the excess was paid back.
However, if the refund by the employee is not made within a reasonable time of the overpayment (whether in the same tax year or soon after the end of the tax year), there may be reporting consequences. Details may need to be given on form P11D – ask HMRC if this applies.
Employee’s unreimbursed incidental overnight expenses
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’s no relief for expenses which are not reimbursed by the employer.
More than one night away
The total of the exemptions for each night is simply compared to the total of the payments for that period. For example, where an employee claims £20 for a 4 night stay away from home in the UK the exemption would apply even if the employee spent £5 on the first night, £5 on the second, £6 on the third and £4 on the fourth because the total does not exceed the total exemption limit (4 nights at £5 exemption per night).
This rule must be applied to an unbroken run of consecutive nights in its entirety. An employer may not choose to break up a period of say 5 nights into one consecutive period of 4 nights plus one stand-alone night.
National Insurance contributions
National Insurance contributions are not payable on any payments of incidental overnight expenses qualifying for the Income Tax exemption.
Working Rule Agreements
Employees in the construction and allied industries in receipt of payments under a Working Rule Agreement, may not always be undertaking journeys qualifying within the terms of the expenses rules that apply to travel costs (see above).
Employers wanting to make payments of incidental overnight expenses, in addition to tax-free lodging allowances under a Working Rule Agreement, will have to identify those journeys which qualify for tax relief. Only in such cases will the personal incidental expenses be exempt from tax.
More than one employee’s incidental overnight expenses on the same bill
The payment of incidental overnight expenses should be made to individual employees within the limits of the individual exemptions. Sometimes a number of employees’ hotel bills are aggregated and paid directly by the employer. If the individual expenditure cannot be readily identified, a reasonable apportionment will be accepted.
Employer’s checks
The employer should be satisfied that:
- the amounts paid do not exceed the maximum amounts payable tax-free
- there’s no double payment of incidental overnight expenses – for example, by paying the standard allowance for incidental overnight expenses and reimbursing in full a hotel bill already including such charges as home phone calls
Form P11D
If there’s no exemption, enter on the form P11D the amount excluding any exempt incidental overnight expenses for each employee who received expenses payments. For example, if the employer paid a hotel bill for £87, which included £4 of incidental overnight expenses, they would enter £83 on form P11D for that employee.
If any incidental overnight expenses are not within the exemption, the employer must show the whole amount on form P11D.
For employers who are registered to payroll benefits or expenses, the amounts should be submitted through Real Time Information.