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To HMRC's employment income manual

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Can HMRC dictate where you can stay while on business?

Business expenses

Since 6 April 2016 a company (or other employer) can treat business expenses reimbursed to employees (and directors) as exempt from tax and NI. Previously the expense was taxable, but the employee could claim a deduction which cancelled the tax liability. However, an expense which isn’t “wholly, exclusively and necessarily” incurred in the course of doing their job is neither exempt nor tax deductible.

Two reasons means no tax deduction

Where a business expense has two purposes it can’t meet the “wholly and exclusively” condition and so is both taxable and liable to NI. What’s more, since 6 April 2016 the onus is on employers to decide and apply PAYE tax and NI to reimbursed expenses where necessary.

Trap. Some tax inspectors argue that where business travel, subsistence or accommodation is more luxurious than it needs to be, HMRC has the right to treat the expense as a personal reward to the employee or director. It takes the view that this is a secondary purpose and therefore the wholly and exclusively test is failed so the whole expense is taxable as a perk.

Trouble for the company?

Perks provided to an employee or director count as part of the salary package, which of course is a tax-deductible cost for your company. The company’s only tax problem is deciding if it should deduct PAYE and NI when it reimburses an expense or declare it as a perk on FormP11D after the end of the tax year.

Personal benefit?

If an employee or director derives a personal advantage through their job, it isn’t automatically taxable as a perk. In Watkis v Ashford Sparkes & Harward 1985 the cost of the hotel for those attending a business meeting included food and drink. This was provided as part of the hotel package. The cost of accommodation, which was a business expense, couldn’t be separated from that for the meals because the hotel billed them as a single charge and so there was no taxable perk.

Trap. If your company pays an additional amount for extras, say, for a round of golf on the hotel course, this cost will be a taxable perk. For it to escape this tax charge it must be part of the usual extras offered and the cost not itemised on the bill. Tip. As long as the main purpose of staying away is business, the cost of any extras that are included with the accommodation charge say, gym membership, food and drink, won’t be taxable or liable to NI. Equally, HMRC can’t dictate the quality of the hotel etc. you stay in. However, we recommend taking a reasonable approach.

HMRC’s manuals

HMRC’s own guidance for inspectors confirms our view above. Therefore, in the event that an inspector challenges your treatment of reimbursed expenses for, say, a five star hotel, point them in the direction of HMRC’s employment income manual (see The next step ).

For a link to HMRC’s employment income manual, visit http://tipsandadvice-tax.co.uk/download (TX 17.02.06).