When employees stay away from home on business, they are entitled to claim tax relief for any expenses that they are obliged to incur and that are incurred "wholly, exclusively and necessarily" in order to do their jobs. If such expenses are reimbursed by the employer and they are included in a dispensation issued by the employer's tax office, they do not have to be reported.

However, employees are also likely to incur expenses of a more personal nature that do not meet the "wholly, exclusively and necessarily" test, for example, newspapers, personal phone calls and laundry. A limited statutory exemption applies to such "incidental overnight expenses".

The legislation, section 240, 241 and 268 of the Income Tax (Earnings and Pensions) Act 2003, removes from any tax charge the payment of expenses and the provision of benefits, including where they are provided by means of vouchers or paid for by an employer's credit card, if they

• are incidental to the employee's absence from home, and
• relate to a continuous period of absence during which
  
  
  • the employee is obliged to stay away from home, and
  • the employee stays away from home for at least one night, and
    
    

• do not exceed the "permitted amount" for the period of absence.

The exemption also applies for NICs purposes.

In addition, the exemption only applies if the employee is genuinely away on business and only applies to expenses that do not otherwise qualify for tax relief.

In the unusual situation of an employee not having a home, i.e. a "place where the employee normally lives", the exemption cannot apply. An example would be an itinerant employee who works at temporary workplaces and always stays in hotels or guest houses.

The "permitted amount" for the period of absence is the aggregate of the following amounts:

• £;5 for each night during the period spent wholly in the UK, and
• £;10 for each night during the period spent wholly or partly outside the UK.

If the total of the incidental expenses paid by the employer for the whole of the period of absence

• does not exceed the "permitted amount" for the period of absence, the expenses are exempt from tax in full
  
  
• exceeds the "permitted amount" for the period of absence, none of the incidental expenses are exempt from tax.

It is very important to note that, if the permitted amount is exceeded, all of the incidental expenses paid are taxable, not just the excess.

The expenses may be met by the employer in any way, including reimbursement, non-cash vouchers, employer's credit card in the employee's name, and payment direct to the hotel. However, employees are unable to claim tax relief on any incidental overnight expenses that the employer does not reimburse.

Although many employers only reimburse incidental expenses that are supported by receipts, the legislation does not require this. The exemption applies even if, for example, the employer pays £;5 per night automatically to cover incidental expenses incurred in the UK, as long as the hotel bill only shows charges for the accommodation and restaurant meals.

Alternatively, if an employer pays hotel bills that include incidental charges and the employee reimburses any amount that exceeds the permitted amount, the exemption still applies.

Examples

1. An employee stays away on business for one night. The employer pays the hotel bill for just hotel accommodation and meals and also gives the employee £;5 towards the incidental expenses incurred. The permitted amount is £;5 and, as the employer's payment does not exceed this amount, the payment enjoys the exemption.
   
   
2. An employee attends a residential training course and stays four consecutive nights in the hotel. The employer reimburses the incidental expenses incurred, i.e. £;4, £;2, £;8 and £;6 for each of the four nights. The total payment by the employer is £;20 and, as that does not exceed the permitted amount of £;20, the exemption applies.
   
   
3. An employee undertakes a business trip in Europe, staying five nights abroad and one night at each end of the trip in the UK. The employer pays £;70 towards the employee's incidental expenses. The permitted amount, however, is £;60, i.e. £;5 for each of the nights in the UK and £;10 for each of the nights abroad. The whole of the £;70 is a benefit and must be reported as travelling expenses. The employee is unable to make a claim tax relief for any of incidental expenses actually incurred.

...back to 9 March 2006

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