A taxing journey

A taxing journey

The English ICA this week responded to the Inland Revenue'sconsultative document on employee travel and subsistence, accusing theproposed legislation of being unclear and 100 years out of date

We live in a time when everyone, except perhaps the most money-grabbing tax advisers, long for simplification in our tax system. Indeed, there are currently committees hard at work seeking to achieve this aim. It was, then, with eager anticipation that I read the recent consultative document on employee travel and subsistence issued by the Inland Revenue last May. This area has long been a source of much discussion between employers and local inspectors, particularly during the course of a PAYE audit. The question is will the new proposals remove or increase the number of grey areas?

For a century, we have lived with a law allowing tax relief only for expenses incurred wholly, exclusively and necessarily in the performance of the duties of an employment. ICTA 1988, s198 is so closely worded that in spite of attempts by many taxpayers to claim tax relief for expenses that common sense would surely allow, the courts have continued to apply a strict interpretation. In particular, tax relief is never allowed for expenses connected with travel from home to a person’s normal place of work.

There are, of course, different situations in which a measure of relief is allowed. For example, where a person’s duties require him or her to move between two places of work in the course of the same employment, travelling expenses may be deductible.

Modern practices

It is unfortunate that the consultative document has not addressed itself to modern day working practices. I would be very surprised if the person who drafted the current law – allowing travel expense deductions – ever anticipated flexible working, allowing employees to spend two or three days a week working from home and communicating with the office by modem.

It is true that some employees are required to work from home and, for this group, the cost of travelling from home to other places of work may be allowable. This, however, is likely to be rare and difficult to establish in many cases. For most employees, the cost of a journey between home and another place of work is unlikely to be in the pursuit of their duties and is therefore disallowed.

Consider too the position of the director of a one-person company. Perhaps a computer specialist using his or her home to write reports or develop new software for clients, as well as the day-to-day administrative tasks of running a company. Much of their work will be performed at their client’s premises and currently they will be allowed a deduction for travelling to those offices. Clearly, that individual’s only regular place of employment is his or her home. The draft legislation does not make it clear whether they will, in future, be regarded as not having a permanent workplace, or whether the whole country is their permanent workplace.

Triangular travel

However, on a more positive note, the Revenue’s consultative document does contain proposals which would change the tax treatment of two situations which have caused particular difficulties in the past.

‘Triangular travel’ occurs where an employee travels not to the normal place of work, but directly from home to another workplace or customer.

Currently, an employee may claim a deduction only for the lesser of either the actual cost of the journey between home and the temporary workplace or the cost of the journey between the normal place of work and the temporary place of work.

Stella, let us say, lives in Reading and usually commutes to her normal place of work in London by car, a daily round trip of 90 miles. On a particular day, she travels directly to Crawley to visit a client of her employer, a round trip of 124 miles.

Stella is allowed a tax deduction for the cost of a theoretical journey, driving 66 miles on the round trip between London and Crawley. The new rules would give relief for the ‘additional cost’ of triangular travel in excess of normal commuting costs.

Under the proposals, Stella will be allowed a Schedule E deduction for the cost of driving 34 miles: 124 miles for the round trip to Crawley, less the cost of normal daily commute to London of 90 miles. Of course, if she normally travelled to London by train using an annual season ticket, then under the old rules she could claim only a deduction for the cost of her theoretical return journey of 66 miles based on the lesser of rule as above. The new rules would allow her a deduction for 124 miles since she saves nothing by avoiding her usual commute. A considerable saving.

It is not uncommon for an employee to be seconded to another work location for some considerable time. Under the current regime, provided that the secondment is for less than 12 months, Stella could continue to claim her 66 mile deduction. Until now, the sting in the tail has been that the employee had then to return to her normal place of work in London at the end of the period.

This requirement is clearly impracticable in many cases and is impossible where the original workplace no longer exists. The consultation document therefore proposes to remove this condition. Unfortunately, there are no proposals to increase the 12 month limit, which would have allowed more flexibility.

Some employees, such as computer consultants and construction workers, will work at a succession of places as part of the same employment spending varying lengths of time in each location. Although working rules agreements provide that certain minor travel and subsistence payments are not taxable, travel and subsistence expenses incurred by site-based employees generally are not tax deductible. Only an employee’s costs incurred in connection with travel which is needed actually in doing the job are allowed.

The new legislation will allow a tax deduction both for travel and for reimbursed subsistence in connection with attendance at any place required in the performance of the individual’s duties of employment.

The costs of normal commuting will continue to be disallowed. Unfortunately, the proposals as they are currently drafted are a little vague as to how normal commuting costs are to be determined. Under self-assessment, an employer must calculate the employee’s benefits on form P11D. Employers will, therefore, need to split the cost of a journey between business and non-allowable travel. This is likely to be a particularly burdensome task and an area fraught with difficulties for both employers and employees.

Although this is a welcome first attempt at improving this area of tax legislation, I can’t help feeling that a more radical rethink might have been better.

Anita Monteith is a freelance writer and lecturer, and deputy chairman of the tax faculty of the English ICA.

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