Does mixed purpose mean travel expenses are taxable?

Reporting

Since 2016, your clients can pay or reimburse a director’s or employee’s job expenses, including travel and accommodation costs, without the need to report the details to HMRC. This rule only applies if the expenses would be tax deductible had the director or employee personally incurred them and not been reimbursed. The responsibility for deciding if this condition is met falls on the employer. HMRC provides guidance but it’s not clear about expenses where they partly relate to business travel etc. and partly to private.

Exception to the rules

Unlike other types of job expense there’s no requirement for the exemption to apply that travel etc. costs be “wholly, exclusively and necessarily” incurred by an employee in doing their job. Instead, an expense need only be:

• necessary for the worker to do their job; and
• incurred under an obligation by the employee.

The important distinction between the general expenses rules and those for travel etc. is that the latter allows an expense to be divided between exempt and non-exempt elements.

Example. Andy visits a French client in May 2023. He spends his weekend off in the middle of his business trip sightseeing in Paris. The flights cost his employer £380 and the hotel £1,600 for two weeks. Andy also spent £40 per day on meals plus £500 for taxis to and from the airport, the hotel and the various job sites. Any expenses incurred specifically for Andy’s sightseeing trip to Paris, e.g. his £40 per day subsistence and any travel costs met by his employer are not tax exempt and should be reported.

Pro advice. Had Andy not spent time sightseeing the subsistence costs for those days would have been exempt expenses. Although they were non-working days they would have been just part of the overall subsistence expenses for the business trip.

Expenses paid to an employee that are not exempt must be reported. As an employer your client can report them in one of two ways:

• if your client has registered for payrolling with HMRC, they should include them as taxable pay (but not pay liable to NI) and apply PAYE tax in the same way as salary. At the end of the tax year they report the payments as liable to Class 1A NI and include the NI due on the P11D(b) declaration which must be submitted by 6 July; or
• complete an online Form P11D and submit it to HMRC after the end of the tax year, by 6 July.

Composite expenses

This example looks at the position where expenses can be clearly identified as having either a business or private purpose. However, because of Andy’s sightseeing trip to Paris, the cost of the fights to and from France and the hotel etc. while there, serve both business and private purposes. It would seem unreasonable to treat these as non-exempt expenses, so how should Andy’s employer proceed?

Andy’s employer simply needs to consider the rules for travel etc. carefully. Were the expenses necessary for the employee to do their job and was the employee obliged to incur the expense had their employer not paid it? The answer is “yes” to both and so the whole cost is an exempt expense. Pro advice. The private use of expenses resulting from Andy’s sightseeing isn’t relevant in answering the questions.