Employee Travel

The Inland Revenue have finally published details of their interpretation of the new rules on employee travel expenses. These new rules apply to journeys made on or after 6 April 1998 and are summed up by them as follows:

In order to establish whether a particular journey is allowable or not, we need to establish whether or not it is ordinary commuting. The Inland Revenue say that ordinary commuting is travel between the employee’s permanent workplace and

• The employee’s home; or
• Another place visited for non work reasons; or
• A place where another job is carried out.

Obviously, the next factor is to consider is what constitutes a permanent workplace. The Inland Revenue regard a workplace as permanent if it is visited regularly in the performance of the employee’s duties. Regular means the attendance is frequent, forms a pattern, or is where the vast majority of the duties are carried out.

There is light at the end of the tunnel. If attendance at a workplace is for a limited duration, or is only temporary, then it will not be regarded as a permanent workplace, and therefore travel to and from it is an allowable expense. If your visit to a site is "self contained" i.e. arranged for a particular purpose, then it is likely to be deemed to be for a temporary purpose.

If you visit a site regularly, say once a week, but the task performed at that site is of limited duration or for a temporary purpose, then the site will not been deemed to be a permanent workplace. It is assumed that as a contractor, the work you carry out will be deemed to be of a limited duration, due to the nature of the work, and the fact that your company has a fixed length contract with either the agency or the client.

The aspect of the new rules which will probably be of most interest and relevance to you is the "24 month rule". This rule will be applied by the Inland Revenue to effectively turn a temporary workplace into a permanent workplace. The rule states that a workplace cannot be a temporary workplace if the employee attends it in the course of continuous work which lasts, or is likely to last, more than 24 months.

A test will be applied to determine whether or not you will spend, or are likely to spend 40% or more of your working time at a particular workplace over a period of 24 months. If the Inland Revenue succeed in establishing that the workplace is not temporary, then travel to and from it will not be allowable.

If the Inland Revenue agree that the workplace is temporary, then tax relief is allowed on the travel costs until the earlier of:

• 24 months have elapsed at the site; or
• the date a new contract is signed which will take the total time at the workplace over 24 months.

For example, if you start at a new site on a 12 month contract, and renew it after 12 months, then the first 24 months of travel is allowable. If however, you sign a 12 month contract and renew it after 12 months with an 18 month contract, then tax relief is only available for the first 12 months until the date at which you knew you would be at the site for more than 24 months.

The 24 month rule should be borne in mind during contract negotiations and renewals, but don’t forget, it is the time at a site which is important, rather than the length of the actual contract.

Another important factor, is that the Inland Revenue have said that if you move home, to be nearer your workplace, it could be an indication that you intend to be at a site for longer than 24 months. They will not rely solely on this, but it could be used against you. If you don’t move, you can always argue that it was because you didn’t intend to be at the site for more than 24 months.

This aspect of the new rules is very subjective, and will be open to judicial interpretation, but I suspect that the Inland Revenue are relying on the fact that it is unlikely that it will be worth any individual taking the matter to court.

Another area left vague to suit the Inland Revenue is breaks in continuous attendance. The 40% aspect of the test is likely to be used. Don’t forget, that if each visit to the site is for a separate, unrelated, self-contained purpose, then the length of each visit should not be added together.

For example, you are at a site for 18 months, then spend 3 months away and return to the site for a further 6 month contract. You can get tax relief on the travel for the first 18 months, plus the next 3 months at another site, but when you return you cannot claim tax relief on the travel because you will be spending more than 40% ((18+6)/(18+3+6) = 88.88%) of your time at the site over a 24 month period.

For your current contract, if you have been on site for less than 24 months, and don’t expect to be there for more than 24 months, then journeys from 6 April 1998 will qualify for tax relief.

A very important point to bear in mind is that if you only carry out one contract throughout the life of your company, even if it lasts less than 24 months, then no tax relief is available.

The Inland Revenue have clarified their view on working from home. If they are satisfied that you work at home because the nature of the work requires it, then your home will be treated as your permanent workplace for tax purposes. If the Inland Revenue think that you work from home because it is more convenient, then your home cannot be treated as your permanent workplace. The advantage of having your home treated as a permanent workplace is that travel from home to another permanent workplace is allowable. This is a very difficult area, and I would suggest that unless you spend more than 40% of your normal working day at home, you should not try and have your home treated as your permanent workplace.

It should be borne in mind that journeys will only attract tax relief if they are deemed to be "necessary". For your normal day to day work, this should not be a problem, but if for example, you travelled to your place of work to merely to attend a Christmas party, then that journey would not be allowable.

There may be a temptation to change one’s workplace every 24 months and the Inland Revenue have provided for this. There must be a "significant" change in the journey undertaken. There are two aspects which will be examined, the actual journey undertaken, and also the cost of the journey. This can best be illustrated by way of examples:

If you are working in London on a particular contract, and then move to a new contract, still within London, but say, ten tube stops further on. This will not be regarded as a change in workplace because the cost of the journey will remain the same, and the actual journey will not be much different.

If you drove 25 miles south each day and changed to a contract 25 miles north, this would be considered a change in workplace because although the cost of the journey has not changed, the journey itself has changed drastically (in the opposite direction).

The rule of thumb is that changes within metropolitan areas are less likely to constitute a change than those within rural areas.

If however, the geographical change is small, but the new contract is for a specific short term purpose, then relief can be claimed subject to the 24 month rule.

If you specialize within a specific field, then changes in contracts will be examined much more closely. If for example, you deal in banking systems, and do most of your work within the City of London, then the Inland Revenue have stated they will argue that the Square Mile is your permanent workplace. This will be the same for any other sector concentrated within a geographical area.

Again, this aspect of the new rules is a grey area and open to interpretation

Tax relief on the total cost of each journey can be claimed. The route taken does not necessarily have to be the shortest, but it should be the most "appropriate". You can make a small detour to avoid traffic or have a meal, but if you visit a relative on the way, you must deduct the cost of the detour.

The costs include subsistence related to the business travel. If you stay away from home during the week, and the journey from home to the workplace has been deemed a business trip, then the costs of the hotel, modest meals and daily travel is allowable.

Incidentals, such as private calls, laundry, newspapers, in-house films cannot be claimed if paid for by yourself, but if your company settles the bill directly then an average of £5 per night can be claimed.

The actual cost of the trip or the standard of travel or accommodation does not affect whether or not the trip is allowable, but if the Inland Revenue think that the trip represents a reward or celebration or is extravagant they will disallow the entire cost. Basically first class travel is allowed, but limousines are not. Executive rooms are allowed, but honeymoon or presidential suites are not.

If you use your own car for business trips the mileage can be recovered using the Fixed Profit Car Scheme (FPCS) rates. This scheme is easy to use - see our mileage form. We list below the rates for the year ending 5 April 2000.

If you have a company car although the company will continue to pay all of the running costs of the car, the business trips described above will count towards your total business mileage, and if they take you over the 2,500 or 18,000 mile thresholds, your tax liability will be reduced.

These new rules, will mean that most contractors can reclaim more expenses than previously. Coupled with this is the need to keep proper records detailing the exact nature of each expense and details of each business journey.