Incidental overnight expenses – A little known tax break
Expenses incurred by an employee on behalf of a company can only be reimbursed under the 'wholly, exclusively and necessarily' rules for work undertaken 'in the performance of the duties of employment'. It is insufficient for the expense to be merely relevant to the job or connected to the duties of the job. This rule aims to prohibit the cost of expenditures that have a private purpose, which are therefore taxable as 'emoluments'. This situation may pose a problem in claims for reimbursement of expenses by an employee when traveling for business reasons, as sometimes personal expenses will also be incurred.
However, the incidental overnight expenses exemption allows an employer to cover small personal expenses when an employee stays away for work, without the employee incurring a tax charge and without needing to report the expenses to HMRC. Examples cited in HMRC's employment manual include newspapers, laundry costs, and telephone calls, i.e., small incidental items where a receipt may not be available. A key aspect of the exemption is that the employer must reimburse the expense – the relief is unavailable otherwise.
The exemption limit for travel within the UK is £5 per night for an overnight stay and £10 per night for overseas trips. The exemption can be applied as long as the total incidental overnight expenses do not exceed the allowance for the entire trip. Importantly, if a payment exceeds these limits, the entire payment becomes taxable and not just the excess. However, there are two methods by which a company and its employees can benefit from this exemption:
Make it a company policy that any excess is reimbursed by the employee where personal expenses exceed the limit. This will bring the whole payment back within the tax exemption.
The company can pay a £5 or £10 per night allowance (for UK overnight stays and non-UK overnight stays respectively) for personal costs regardless of whether it is spent. If it is not spent, there is no requirement for it to be repaid and no tax implications for the company or employee.
Employers wishing to pay or reimburse employees’ expenses at a rate other than those set can apply for HMRC's approval of a 'bespoke rate'. An application must outline the rate the employer wishes to pay and demonstrate that the amount is a reasonable estimate of the expenses incurred and that a deduction would usually be allowed for those amounts.
Where additional services are part and parcel of the room tariff and not separately charged, no benefit in kind applies. However, where the company pays for additional facilities, e.g., pay-per-view movies or use of the hotel gym or pool, these are taxable on the employee.
The incidental expenses allowance relates to employees only. A director can claim if employed by the company, but the same cannot be achieved by someone who is self-employed (there being no employee).
