The next step

Detailed commentary on the tax treatment of non-deductible expenses for directors and employees

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To HMRC's guidance on business journeys

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A working holiday - is it tax deductible?

Business, private and mixed expenses

You probably already know about the general rule for expenses; to be tax deductible they must be incurred “wholly and exclusively” for the business. This condition is modified for directors and employees who incur travel expenses; to be tax deductible they must be incurred in the performance of their job. However, this rule is not as straightforward as it might seem.

For detailed commentary on the tax treatment of non-deductible expenses for directors and employees, visit http://tipsandadvice-tax.co.uk/download (TX 20.09.04).

Example. A director often travels from home to visit a customer on the way to the firm’s offices. One interpretation of the rules suggests that none of the cost of the journey to the office from home is tax deductible because travel between your home and your normal place of work (a commute) counts as a private journey. Alternatively, the travel is two journeys, one from home to the customer and one from the customer to work. The second part meets the condition while the first doesn’t because any journey beginning or ending at home is commuting.

Tip. Because both interpretations have flaws HMRC usually (but not always) accepts that a journey incorporating a business element which starts from or ends at your home meets the condition for a tax deduction.

Example. You travel 200 miles to visit several customers. You stay overnight in a hotel. In the evening you go to the cinema. While the cost of travel from your hotel to the cinema is clearly private, HMRC says this won’t jeopardise the tax deductibility of the main journey from your home or office to visit customers. HMRC’s guidance confirms this (see The next step ).

A business trip with pleasure

In the example above the purpose of the journey is clearly business which happens to offer an opportunity to undertake private activities. What’s more, it’s easy to identify and separate the business from the private element of the trip. This means the cost of travel from home or work to the hotel and the customer is tax deducible, while the cost of travelling to and from the cinema is not. A similar approach can be used to differentiate between deductible and non-deductible expenses if the main purpose of your journey is private but you undertake some business while away.

Example. You’ve booked your family’s summer holiday in southern Spain. You intended to leave them to their own devices for a couple of days while you fly to Barcelona to visit some work colleagues to discuss business. The cost of your and your family’s travel and accommodation in southern Spain is obviously not related to travelling in the performance of your job even though it is one leg of your trip to visit work colleagues. None of it is tax deductible. Conversely, the cost of your flight to and accommodation in Barcelona is business, and therefore tax deductible, even if you visit a bar or two in the evening with your colleagues.

Tip. If you’re combining business with pleasure keep detailed records that identify the tax deductible and non-deductible cost elements.

For HMRC’s guidance on business journeys, visit http://tipsandadvice-tax.co.uk/download (TX 20.09.04).