I don’t know about you, but I’ve noticed that there are a lot more people about on the roads, and on public transport, now than there has been for a very long time. It seems that the world, and in particular the world of work, has started rotating again, and with this renewed activity comes the perennial question of whether you can claim the cost of all this scurrying about against your tax bill. This is where the non tax expert tends to need a lot of guidance through the maze of our supremely tangled and nebulous tax system. Given the amount of money everyone’s spending on travelling, and eating and drinking whilst they’re away on business, this is a big issue, and one which we hope this short guide to travel and subsistence expenses will help you unravel.
Employed or Self Employed?
First of all, though, we’ve got to dig down into another famously obscure aspect of our tax law: the crucially important difference between someone who works on a self employed basis, and someone who works as an employee of another. For these purposes, you fall on the employment side of the line if you’re operating through your own limited company, even though, in a sense, it’s you employing yourself.
The difference between employment and self employment is very important from a number of points of view – particularly because the national insurance hit you’ll suffer varies radically between the two statuses – but amongst the important reasons for distinguishing between them is the fact that the regime for claiming travelling and subsistence expenses is also radically different. So let’s start by having a look at what this difference precisely is.
There are widespread misunderstandings about what makes a person employed rather than self employed, or vice versa.
The difficult situation arises, of course, where a person is paid for his or her own services and time, and where this is not just a one off provision of a service (like someone coming to clear your drains) but happens on a frequent basis or over a long period. You could easily fill a book with learned disquisitions about how to distinguish between the employed person and the self employed person in such a situation, but our task here is the more difficult one of distilling this into a few short paragraphs so that we can get on to the main topic, which is claiming travel expenses against tax.
A good way to start might be by dispelling a few of the myths. One very frequent misunderstanding is that working for more than one different employer or client is sure sign that you’re self employed. Conversely, if you work for just one person, the myth goes, that means you’re an employee. In fact, the number of different people you provide your services to is almost completely irrelevant. Another irrelevance is how you describe the situation. Simply calling yourself an independent contractor, and raising invoices (rather than being paid through the payroll) doesn’t make you an independent freelance service provider.
No, if one were to distil the difference down to its very essence, the distinction between employment and self employment is about control. How much control does the client/employer exert over the individual providing the services? Does the person have to work in a certain place, at certain set times, and in accordance with specific instructions? There are instances, of course, where the location of the provision of services is pretty much laid down by circumstances. If I get a man to come along and service my swimming pool, he can’t really do this anywhere else than in my back garden. But I’ve no idea how he does the job, and he pretty much always tells me when he’s coming, rather than the other way round. So he’s self employed, as is the doctor who treats me for varicose veins or eczema.
The Master/Servant Relationship
The difference is sometimes summarised by asking, in the quaintly old fashioned words reminiscent of a hundred years ago or more: is there a “master/servant relationship?”. The very quaintness and old fashionedness of this phrase points to an interesting way in which our methods of working have changed: and therefore the proper tax treatment of them. There tends to be far more freedom given these days, even to people who are recognised as being employees and whose pay is put through the monthly payroll, with deductions of PAYE and national insurance. There’s far less prescriptive telling people what to do. So in our view there are probably an awful lot of people who are actually treated by their client/employer as if they were wage slaves, and suffer the far more onerous levels of national insurance amongst many other disadvantages, but who are “really”, if anyone took the trouble to take a long cool look at the situation, self employed operatives. The fact is that the rules relating to employment and self employment in our tax system are relics of a state of society, and a way of organising work, that, to a large extent, no longer exists.
Travelling as an Employee
Having said all that, there’s a built in inertia in the system which tends to favour people carrying on being treated as employees even when, properly speaking, they shouldn’t be. HMRC will always tend to argue that a person should be treated as an employee where there’s any room for such argument; and the obvious reason why they’re so keen to do this is because they get their tax and national insurance handed to them “on a plate” by the employer. Generally speaking, too, the rules for claiming expenses are much more stingy and difficult for employees than they are for the self employed.
Oddly enough, though, when you come down to that particular class of expenses described as travel and subsistence, it’s more often the other way round. It’s often better to be an employee than self employed, because in many ways the rules are more generous.
Not only are they more generous, but they’re also much clearer. Clarity is not the word you’d generally use to describe any of the UK tax rules, but someone’s actually thought about this a bit – maybe, one thinks cynically, because taxmen and women themselves travel in their jobs, and don’t want to find themselves getting tied up in any tangle of impenetrable rules for their own finances. And so we have the concepts of the “permanent workplace” and the “temporary workplace”.
Permanent and Temporary Workplaces
The whole problem of some travel and subsistence expenses being allowable and some disallowable results from a determination on the part of the tax authorities that they don’t want to allow the costs of “ordinary commuting”. It’s not known whether this prejudice against tax relief for commuting costs is a rationally thought out feeling, or just something they’ve inherited from immemorial years of questions people’s tax claims; but it does result in a need for the tax people to provide some kind of workable definition of what is commuting and what is business travel. The way they’ve done this is to say that travel to a permanent workplace is commuting, and therefore disallowable, and travelling to a temporary workplace is business travel, and therefore allowable.
The way the rules go about defining the difference between permanent and temporary workplaces is by saying what a permanent workplace is, and then leaving you to infer that any workplace that doesn’t fit into this definition must be a temporary one.
A permanent workplace is one is that you travel to for a substantial amount of time each week on average, over a period of two years or more. If your employment is shorter than two years, a workplace which occupies the whole duration of that contact is a permanent workplace.
An area can be a workplace for these purposes, so if, for example, you travel to various locations in the City of London, that can be treated as a permanent workplace if it goes over the two year etc rule, even if there are different office buildings or other locations involved within that overall area.
Peripatetic Workers
So peripatetic workers, who spend less than two years in each location, such as construction site workers, engineers, computer software consultants, and whole range of others who for whatever reason can’t join in with the current fashion of “working from home”, will often, I suspect much to their surprise in some cases, find their travelling costs are not loaded with the stigma of the “commuting” description, but they are allowed to claim all of their costs for being away from home against tax.
What is “Subsistence”?
And now we come on to one of the oddest features of these rules. If you’re familiar with the way self employed businesses are taxed, you’ll be aware of the hoary old “wholly and exclusively” rule. No expense which isn’t “wholly and exclusively” for the purposes of the business can be claimed against tax. So all kinds of expenses with a dual purpose, like clothing, medical costs, and life assurance get disallowed because it’s not just the business that benefits. And you’d have thought that eating and drinking was a prime example of this – as, indeed, it is in many contexts: you eat not just in order to carry on your work (although you need to eat in order to do so) but also to preserve life and because you like the taste. But in the area of business travel, when you’re away from home or your normal office for work purposes, this rule doesn’t apply. Instead, eating and drinking at the temporary workplace can also be claimed.
So this brings us back to the question asked in the heading above. What, precisely, is “subsistence”? You might easily say that going to the pub next door to your temporary workplace for a pie and a pint is necessary subsistence expenditure, because you couldn’t do an afternoon’s work on an empty stomach: but does this category of “subsistence” extend to a silver service four course lunch with champagne and washed down by burgundy?
Although we haven’t seen this written down intelligibly anywhere, we suspect very strongly that it’s a case of the first commandment of tax planners: “Though shalt not take the mickey!” If your expenditure on eating and drinking is “reasonable”, you’re probably not doing anything which will raise the ire of the tax inspector. But live too obviously the high life, and you’ll arouse his envy and disapproval.
To sum up, whilst the legislators did an admirable job of making a reasonably clear system for claiming travel costs in the set of rules we’ve just been describing, they have left one vague and woolly area of interpretation: which is the point where necessary subsistence becomes taking the mickey.
Pity the Self Employed
This isn’t something one normally says in the tax context, because generally speaking, as we said, self employed people are treated far better by our tax system than employees are. But for the self employed, we haven’t got a relatively clear cut and easily interpreted set of rules: we’re back in the old situation of a number of tax cases, not all of which are easy to reconcile with each other, as interpreted by general HMRC and accountancy practice.
The base of your business, as a self employed person, is important. As a general rule, subject to exceptions, travelling from your business base to somewhere else will be allowable. But this will only take you so far on your journey towards tax deductibility (so to speak). It’s tempting to say that a self employed person can usually make his home the business base, meaning that any travel at all will be claimable. But if a self employed person travels from home to the same client premises day in and day out, that looks very like commuting, and will likely land you with the frown of disapproval from HM Inspector of Taxes that we all so wish to avoid. Of course there are huge number of potential grey areas between the extreme case, where a person works in the same office or other location away from home every day, and the situation at the other end of the spectrum where they are travelling around different places all the time. All we can say, and it’s not very useful, is that if you’re in this grey area you should use your common sense – bearing in mind that the taxman will do the opposite of giving you the “benefit of the doubt”.
And there’s always the counterintuitive suggestion of “artificially” converting your status from self employed to employed, by operating through a limited company in which you own all the shares: thus creating the legal fiction that you are an employee and therefore entitled to the clearer, and sometimes much more favourable, rules for permanent and temporary workplaces. It obviously depends on how important an element in your overall business economy the travel and subsistence costs you incur actually are.
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