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HMRC guidance on relocation expenses

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Tax implications of staff relocation costs

Relocation package

There are no obligations on employers to support employees who are relocating for work, unless the employee’s contract of employment states otherwise. However, providing financial support for a relocation can go a long way in incentivising employees to agree to the relocation on positive terms. From an employer’s perspective, it can also be more time and cost-effective to offer a relocation package to avoid a potential redundancy procedure or negotiated exit where an employee objects to the relocation. Statutory and possibly enhanced redundancy payments are likely as well as the expense of hiring and then training new employees. When coupled with the man-hours these processes take, encouraging and incentivising existing employees to relocate may be a much cheaper and more efficient option.

Relocation expenses tax break

If an employee is being asked to move to a new location because they are taking a new role in the business or their workplace is being relocated, then there’s a tax break which allows you to pay for up to £8,000 of their qualifying relocation expenses tax and NI free. The qualifying costs include: the costs of selling and/or buying a property; the costs of the actual move; the costs of transport; money spent on purchasing items for the new home; bridging loans, which is where the employee needs a loan to help pay for a new property where the sale of their current property has not yet completed.

Tip. To fall within the exemption, the employee has to move their main residence as a result of the relocation, whether or not they sell their current house, and the new residence must be within reasonable travelling distance of their new place of work, whereas their current residence must not.

Tip. There are no hard and fast rules which say when a travelling distance is “reasonable”; HMRC says that it’s a matter of common sense (see The next step ).

Tip. The exemption applies to directors equally as it does to other employees.

Tip. Rather than pay an £8,000 allowance to the employee, you should either fund the costs directly or ask the employee to complete an expenses claim, attaching the relevant receipts. If you provide a round-sum relocation allowance to the employee, then this will be subject to PAYE/NI as normal.

VAT

A common pitfall is that the £8,000 tax/NI free limit includes VAT so if all the relocation costs have VAT on, the maximum tax/NI free limit is £6,666 + VAT.

Reclaiming input VAT. You are entitled to reclaim input VAT on the costs. Tip. Record the employee’s name on the purchase invoice(s) on which you are claiming input tax in the event of a query from HMRC during a compliance visit.

Trap. In the case of claiming input tax on estate agent fees, the invoice will be made out to your employee. This is not a problem but you must be able to prove that you have paid the fees in question, either directly to the agent or via an employee expenses claim.

HMRC guidance on relocation expenses