TRAVEL EXPENSES - 26.03.2009

Business meals are tax-free - it’s official!

Background

The government is in the process of putting into law the Taxman’s unofficial tax concessions. But along with this regulation comes a new, unexpected, tax relief. This includes the cost of meals whilst travelling on business. What’s the full story?

Different rules

The changes will only affect the self-employed, including those in a partnership. The cost of meals incurred by employees whilst on business are subject to different rules. We will look at tax-saving tips for these in a future article.

An old battleground

For a very long time the Taxman has successfully argued in the courts that the cost of food and drink while travelling on business is not a tax deductible expense. Previously, the only exception to this rule was where food was purchased in connection with an overnight stay.

What’s changed

s.57Aof the Income Tax (Trading and Other Income) Act 2005 takes effect on April 6 2009. It says that a tax deduction for the cost of food and drink may be claimed where the cost of the corresponding travel is allowed. Travel expenses are allowed where the person’s business is “itinerant”, e.g. that of a self-employed salesperson, or the where the person concerned is not travelling to the same place as part of their normal pattern of work (see The next step).

Retrospective effect?

Although the law has not yet come into force, the Taxman pre-empted the change and amended his own instructions at the end of last year, with no reference to the forthcoming change in the law. Our conclusion is that he must be prepared to accept claims for the cost of meals from that point. That is, for all open tax years as at the end of 2008.

Tip. Although s.57A doesn’t come into force until the 2009/10 tax year, you can make a claim for subsistence costs for 2007/8 and 2008/9 (see The next step).

Not so entertaining

There’s been no change to the rules regarding business entertainment expenses. Tax relief is not allowed on the cost of meals for customers etc.

Tip. If you are eating out with clients, get the cost of your meal and, if practical, drinks put on a separate bill. You can claim tax relief on the cost of your food and drink under the new rules.

Example. Supposeyou’re visiting a client to discuss a software system you’ve recently installed for them. As it’s lunchtime you suggest eating at a nearby restaurant. You pay for the meal but ask the waiter to split the bill. You can claim the cost of your share against tax.

Tip. You can also reclaim the VAT on your share of the cost of your meal.

Trap. If the only purpose of eating out is to entertain your clients etc., rather than being in the course of your business, then the new rules will probably not apply.

For a definition of “normal pattern of work” (TX 09.12.03A) and for information on how to make a tax claim for subsistence (TX 09.12.03B), visit http://tax.indicator.co.uk.