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14 February 2001
Correct Treatment Necessary
NICHOLAS YASSUKOVICH explains the expense claim problems of expatriates seconded to the United Kingdom.
NICHOLAS YASSUKOVICH explains the expense claim problems of expatriates seconded to the United Kingdom.
Correct Treatment Necessary
NICHOLAS YASSUKOVICH explains the expense claim problems of expatriates seconded to the United Kingdom.
INLAND REVENUE TAX Bulletin 50 (December 2000) includes long-overdue and welcome clarification of the application of the general employee travel and subsistence rules to foreign nationals working in the United Kingdom. The article acknowledges that the broad principles expounded can apply equally to United Kingdom nationals working abroad. The Bulletin is the product of extensive discussions between the Inland Revenue and the 'Big Five' firms. It contains one important and favourable clarification and also some useful guidelines for tax advisers, employees and expatriate management professionals to follow when planning and implementing an international assignment to the United Kingdom. Nevertheless, there remain many grey areas and also traps for the unwary.
The general rules were reformed in April 1998 and in a previous article (Taxation, 27 May 1999 at pages 218 to 221) I considered how they operated within an expatriate context. This article updates the position following the Tax Bulletin.
Relevant legislation
Initially, it is useful to remind ourselves of the relevant legislation. This can be found in section 198, Taxes Act 1988 which provides relief against emoluments liable to tax under Schedule E if they are used to defray the cost of 'qualifying travel expenses'. These expenses are defined at paragraph (1A) as those attributable to the necessary attendance at a workplace which are not 'ordinary commuting or private travel'. Schedule 12A to the Taxes Act 1988 goes on to define 'ordinary commuting and private travel'. The overall effect is to allow tax relief for 'travel expenses' associated with attendance at a 'temporary workplace'. Travel expenses include associated subsistence costs like meals and accommodation at the temporary workplace (see Inland Revenue Booklet 490, paragraph 5.4).
Schedule 12A to the Taxes Act 1988 and Inland Revenue Booklet 490 provide much material on the definition of a temporary workplace and the Tax Bulletin article seeks to clarify this further in the specific context of foreign nationals working in the United Kingdom. It also outlines what amount of relief might be given for expenditure on accommodation and general subsistence.
Temporary workplace
Turning first to the temporary workplace, the Inland Revenue is concerned here with tax avoidance and the Tax Bulletin identifies two factors which it will consider very closely. A site will not be a temporary workplace:
if in fact the employee is attending it as part of a new employment. This is derived from the Inland Revenue's reading of paragraph 5(1)(b) of Schedule 12A to the Taxes Act 1988 which states that the workplace cannot be temporary if the employee's attendance at it comprises 'all or almost all of the period for which the employee is likely to hold the employment';
for any period during which either the employee or the employer reasonably expects it to last longer than 24 months. This re-emphasises the 24-month rule in paragraph 5(1)(b). Companies must take care that where an assignment is stated to be for 24 months or less, all other internal documentation is consistent with this. For example, project or business plans should not suggest that the employee will still be working at that location beyond 24 months.
The Inland Revenue is taking a legalistic approach to the issue of new employments. This will certainly deny the relief to those who come to the United Kingdom to work, having successfully applied for a job at an organisation with which they have had no previous contact. However, the majority of expatriates come to this country as part of an international organisation which has identified a temporary role for them in the United Kingdom. Even if both the employee and employer consider the United Kingdom assignment an integral part of the employee's career at the organisation, the Inland Revenue may seek to deny the relief if it believes that there is no substantive, continuing home country employment.
Each case will be considered on its merits and the Inland Revenue may seek advice from an employment lawyer. Factors which suggest an ongoing employment are continuing pension rights, seniority rights and incentive scheme participation in the home country. Termination of home country employment and a major change in the duties at the new workplace would indicate a separate employment.
This is perhaps best put into context by outlining the two alternative approaches to expatriate management:
The home-based philosophy – as far as possible, the terms and conditions of the expatriate's employment remain the same as they were in the home country prior to the assignment. The employee remains in the home country benefits plan, bonus arrangements and performance measurement scheme. He may work in the host country but he is paid as if he were in the home country with the exception of some extra allowances.
The host-based philosophy – in its purest form, this treats the expatriate exactly as if he were a local hire in the host country. At the end of the assignment the employee must look for a job back in the home country but is expected to be able to find one on the strength of his performance.
The Tax Bulletin examples fit neatly into these two extreme positions. An assignment structured using the pure home-based philosophy will rarely be considered a new employment. One structured on the pure host-based approach will be, with the result that relief will be denied. Many organisations use both philosophies and a significant minority of expatriates work for companies which blend both approaches into one single assignment structure. Advisers will need to consider the terms and conditions of these assignments carefully to identify whether or not relief is due.
'Additional costs'
The bulletin proceeds to outline some guidelines for quantifying the relief available, focusing on the subsistence element rather than pure travel costs. It considers the overall thrust of the legislation, then looks in detail at accommodation costs separately from general subsistence.
The cost of subsistence must be associated with the business travel and the test to use is whether or not the costs 'are additional to any costs that the employee would incur if it were not for the business travel'. Thankfully, provided that it can be shown that the expense represents additional costs, no account need be taken of the expense now not incurred at home in quantifying the relief. This avoids some complex and potentially impossible calculations – for example, the full cost of a meal in a United Kingdom restaurant may be deducted, not the cost less the expense of a home-cooked dinner back in the home country!
There had been fears for some time that the Inland Revenue would require expatriates to retain their home country accommodation as proof that they were actually incurring additional costs. Fortunately these have proved unfounded. The Tax Bulletin article confirms that an expatriate employee coming to the United Kingdom is substantially different from one of the examples found in Booklet 490 (namely that of Millie in paragraph 5.5 who was an itinerant employee with no permanent home) and that even if an expatriate disposes of their home country accommodation, 'the expense of accommodation in the United Kingdom is an additional expense'.
Accommodation
Restrictions on relief
The Tax Bulletin article indicates a number of circumstances in which relief for some of the additional expense represented by accommodation may be restricted to ensure that only the business element is relieved. It outlines a number of principles to consider in identifying the business element of any accommodation cost and gives four examples which draw out three 'themes' where relief may be restricted, namely where the accommodation is:
in a location chosen for the employee's convenience which is prima facie not convenient to the employer and more expensive (e.g. outside the normal commuting catchment area); or
used to house the employee's family; or
otherwise extravagant beyond the needs of the business.
The first point should cause few problems in areas where long-distance commuting is normal (e.g. London). An example of an employee assigned to Exeter who chooses to live in more expensive Salcombe because he likes boating is given to illustrate where relief would be restricted.
But it is the second area for restriction which will cause most problems, as many expatriates assigned to the United Kingdom are accompanied by their family. The Inland Revenue's argument is that an employee with a spouse and two children might live in a four-bedroomed house whereas an unaccompanied employee would normally live in two-bedroomed accommodation at most. As the attendance of the family near the location is not deemed necessary for business purposes, the extra cost of the two bedrooms should be denied. This rationale is fine for a short business trip but few would regard it as reasonable for a two-year assignment.
The Inland Revenue's interpretation shows the difficulty of using one set of rules to regulate tax relief in two vastly different sets of circumstances. However, it appears to allow the calculation of the restriction to be by reference to the company's policy. It does so by stating that a restriction will be calculated having regard to 'reasonable accommodation that would have been provided to a single employee.' If company policy is to allow an unaccompanied employee a four-bedroomed house, it would appear that the full cost will be allowed – which leaves companies which use matrices of allowable expatriate accommodation by reference to seniority and family size at a disadvantage. (They can at least balance this with the advantages of administrative and technical certainty.)
In respect of the third theme of excessive accommodation, it may not be assumed that matching the standard of accommodation used by the expatriate in the home country is an acceptable benchmark. However, one of the examples has an expatriate renting a six-bedroomed house and the narrative accepts that there may be good business reasons for this. If there are not, relief will be restricted.
A number of other points arise from their discourse on accommodation.
The 'hotel test'
Where the accommodation is not in an hotel but in rented or company-owned housing, companies may use a safe harbour 'hotel test' to determine whether the choice of rented accommodation per se is inappropriate and calculate the taxable benefit (see the Example ). If the total cost of the housing is equal to or less than the cost of an appropriate standard of hotel accommodation for the same duration, it will not be deemed excessive and relief will not be restricted. In determining what is an appropriate benchmark, the seniority of the employee may be taken into account. Large organisations with favourable corporate rates at expensive hotels may, however, be disadvantaged by this.
It is not clear from the Tax Bulletin whether relief for the cost of any accommodation that passes the hotel test may still be restricted if part of it does not relate to business requirements. It could be argued that if a four-bedroomed house is provided to an expatriate with two children at a cost of £25,000 per annum but the cost of appropriate hotel accommodation for a single person was £26,000 per annum, there should be no restriction in the amount of relief.
The Inland Revenue also indicates that furniture may be provided and no account need be taken of accommodation provided at weekends and during short holidays or other short non-working periods throughout the assignment.
General subsistence
The costs of travel between the temporary accommodation and the temporary workplace are deductible as are the costs of food, drink, utility bills and 'personal expenditure attributable solely to the business travel'. Personal incidental expenditure may also be reimbursed under the rules outlined in section 200A, Taxes Act 1988.
Means of giving relief
The machinery for obtaining relief should be familiar to most employers. The Inland Revenue differentiates between 'round sum allowances' and 'scale rate payments'. Round sum allowances are used frequently by expatriate employers, most often to provide housing assistance by means of a cash housing allowance. The Inland Revenue reminds us that if such an allowance is 'clearly meant to do no more than reimburse the employee for the actual cost of accommodation or subsistence', it will allow the employer to pay it without deduction of pay-as-you-earn.
Permission for this treatment should be formally sought from the Inland Revenue. The amount should be reported on form P11D and declared on the tax return with a deduction taken for the actual allowable expenditure incurred by the employee. Employers may also not account for National Insurance on the payment if 'a specific and distinct business expense is identified in the allowance'.
'Scale rate payments' typically take the form of per diem allowances. Where these have been 'calculated on a scale intended to do no more than reimburse the employee for business expenses' deductible under section 198, Taxes Act 1988, the Inland Revenue will continue to grant full dispensations upon application by individual organisations. However, it has stated that it will not publish a generic, multi-industry set of per diems as is available in the United States, apparently on account of the cost involved.
The benefits of a dispensation are well known as it removes the payments from the tax compliance process altogether. If the employee incurs deductible expenditure over and above this amount it may be claimed on his tax return. If his expenditure is less, he is lucky (or thrifty!).
The Inland Revenue's comments in the Tax Bulletin on the mechanics of granting the relief are not in any way novel. But they serve as a useful reminder for companies with expatriates both inbound to and outbound from the United Kingdom that adapting a dispensation aimed at domestic employees for full use in respect of expatriates can make life much easier for all involved.
Nicholas Yassukovich is a manager in Arthur Andersen's Human Capital practice. He is indebted to Graham Atkins for his help in reviewing this but the views expressed in this article are his own and do not necessarily reflect those of the firm. He can be contacted on 0118 9563417 and at nick.yassukovich@uk.arthurandersen.com.
NICHOLAS YASSUKOVICH explains the expense claim problems of expatriates seconded to the United Kingdom.
INLAND REVENUE TAX Bulletin 50 (December 2000) includes long-overdue and welcome clarification of the application of the general employee travel and subsistence rules to foreign nationals working in the United Kingdom. The article acknowledges that the broad principles expounded can apply equally to United Kingdom nationals working abroad. The Bulletin is the product of extensive discussions between the Inland Revenue and the 'Big Five' firms. It contains one important and favourable clarification and also some useful guidelines for tax advisers, employees and expatriate management professionals to follow when planning and implementing an international assignment to the United Kingdom. Nevertheless, there remain many grey areas and also traps for the unwary.
The general rules were reformed in April 1998 and in a previous article (Taxation, 27 May 1999 at pages 218 to 221) I considered how they operated within an expatriate context. This article updates the position following the Tax Bulletin.
Relevant legislation
Initially, it is useful to remind ourselves of the relevant legislation. This can be found in section 198, Taxes Act 1988 which provides relief against emoluments liable to tax under Schedule E if they are used to defray the cost of 'qualifying travel expenses'. These expenses are defined at paragraph (1A) as those attributable to the necessary attendance at a workplace which are not 'ordinary commuting or private travel'. Schedule 12A to the Taxes Act 1988 goes on to define 'ordinary commuting and private travel'. The overall effect is to allow tax relief for 'travel expenses' associated with attendance at a 'temporary workplace'. Travel expenses include associated subsistence costs like meals and accommodation at the temporary workplace (see Inland Revenue Booklet 490, paragraph 5.4).
Schedule 12A to the Taxes Act 1988 and Inland Revenue Booklet 490 provide much material on the definition of a temporary workplace and the Tax Bulletin article seeks to clarify this further in the specific context of foreign nationals working in the United Kingdom. It also outlines what amount of relief might be given for expenditure on accommodation and general subsistence.
Temporary workplace
Turning first to the temporary workplace, the Inland Revenue is concerned here with tax avoidance and the Tax Bulletin identifies two factors which it will consider very closely. A site will not be a temporary workplace:
if in fact the employee is attending it as part of a new employment. This is derived from the Inland Revenue's reading of paragraph 5(1)(b) of Schedule 12A to the Taxes Act 1988 which states that the workplace cannot be temporary if the employee's attendance at it comprises 'all or almost all of the period for which the employee is likely to hold the employment';
for any period during which either the employee or the employer reasonably expects it to last longer than 24 months. This re-emphasises the 24-month rule in paragraph 5(1)(b). Companies must take care that where an assignment is stated to be for 24 months or less, all other internal documentation is consistent with this. For example, project or business plans should not suggest that the employee will still be working at that location beyond 24 months.
The Inland Revenue is taking a legalistic approach to the issue of new employments. This will certainly deny the relief to those who come to the United Kingdom to work, having successfully applied for a job at an organisation with which they have had no previous contact. However, the majority of expatriates come to this country as part of an international organisation which has identified a temporary role for them in the United Kingdom. Even if both the employee and employer consider the United Kingdom assignment an integral part of the employee's career at the organisation, the Inland Revenue may seek to deny the relief if it believes that there is no substantive, continuing home country employment.
Each case will be considered on its merits and the Inland Revenue may seek advice from an employment lawyer. Factors which suggest an ongoing employment are continuing pension rights, seniority rights and incentive scheme participation in the home country. Termination of home country employment and a major change in the duties at the new workplace would indicate a separate employment.
This is perhaps best put into context by outlining the two alternative approaches to expatriate management:
The home-based philosophy – as far as possible, the terms and conditions of the expatriate's employment remain the same as they were in the home country prior to the assignment. The employee remains in the home country benefits plan, bonus arrangements and performance measurement scheme. He may work in the host country but he is paid as if he were in the home country with the exception of some extra allowances.
The host-based philosophy – in its purest form, this treats the expatriate exactly as if he were a local hire in the host country. At the end of the assignment the employee must look for a job back in the home country but is expected to be able to find one on the strength of his performance.
The Tax Bulletin examples fit neatly into these two extreme positions. An assignment structured using the pure home-based philosophy will rarely be considered a new employment. One structured on the pure host-based approach will be, with the result that relief will be denied. Many organisations use both philosophies and a significant minority of expatriates work for companies which blend both approaches into one single assignment structure. Advisers will need to consider the terms and conditions of these assignments carefully to identify whether or not relief is due.
'Additional costs'
The bulletin proceeds to outline some guidelines for quantifying the relief available, focusing on the subsistence element rather than pure travel costs. It considers the overall thrust of the legislation, then looks in detail at accommodation costs separately from general subsistence.
The cost of subsistence must be associated with the business travel and the test to use is whether or not the costs 'are additional to any costs that the employee would incur if it were not for the business travel'. Thankfully, provided that it can be shown that the expense represents additional costs, no account need be taken of the expense now not incurred at home in quantifying the relief. This avoids some complex and potentially impossible calculations – for example, the full cost of a meal in a United Kingdom restaurant may be deducted, not the cost less the expense of a home-cooked dinner back in the home country!
There had been fears for some time that the Inland Revenue would require expatriates to retain their home country accommodation as proof that they were actually incurring additional costs. Fortunately these have proved unfounded. The Tax Bulletin article confirms that an expatriate employee coming to the United Kingdom is substantially different from one of the examples found in Booklet 490 (namely that of Millie in paragraph 5.5 who was an itinerant employee with no permanent home) and that even if an expatriate disposes of their home country accommodation, 'the expense of accommodation in the United Kingdom is an additional expense'.
Accommodation
Restrictions on relief
The Tax Bulletin article indicates a number of circumstances in which relief for some of the additional expense represented by accommodation may be restricted to ensure that only the business element is relieved. It outlines a number of principles to consider in identifying the business element of any accommodation cost and gives four examples which draw out three 'themes' where relief may be restricted, namely where the accommodation is:
in a location chosen for the employee's convenience which is prima facie not convenient to the employer and more expensive (e.g. outside the normal commuting catchment area); or
used to house the employee's family; or
otherwise extravagant beyond the needs of the business.
The first point should cause few problems in areas where long-distance commuting is normal (e.g. London). An example of an employee assigned to Exeter who chooses to live in more expensive Salcombe because he likes boating is given to illustrate where relief would be restricted.
But it is the second area for restriction which will cause most problems, as many expatriates assigned to the United Kingdom are accompanied by their family. The Inland Revenue's argument is that an employee with a spouse and two children might live in a four-bedroomed house whereas an unaccompanied employee would normally live in two-bedroomed accommodation at most. As the attendance of the family near the location is not deemed necessary for business purposes, the extra cost of the two bedrooms should be denied. This rationale is fine for a short business trip but few would regard it as reasonable for a two-year assignment.
The Inland Revenue's interpretation shows the difficulty of using one set of rules to regulate tax relief in two vastly different sets of circumstances. However, it appears to allow the calculation of the restriction to be by reference to the company's policy. It does so by stating that a restriction will be calculated having regard to 'reasonable accommodation that would have been provided to a single employee.' If company policy is to allow an unaccompanied employee a four-bedroomed house, it would appear that the full cost will be allowed – which leaves companies which use matrices of allowable expatriate accommodation by reference to seniority and family size at a disadvantage. (They can at least balance this with the advantages of administrative and technical certainty.)
In respect of the third theme of excessive accommodation, it may not be assumed that matching the standard of accommodation used by the expatriate in the home country is an acceptable benchmark. However, one of the examples has an expatriate renting a six-bedroomed house and the narrative accepts that there may be good business reasons for this. If there are not, relief will be restricted.
A number of other points arise from their discourse on accommodation.
The 'hotel test'
Where the accommodation is not in an hotel but in rented or company-owned housing, companies may use a safe harbour 'hotel test' to determine whether the choice of rented accommodation per se is inappropriate and calculate the taxable benefit (see the Example ). If the total cost of the housing is equal to or less than the cost of an appropriate standard of hotel accommodation for the same duration, it will not be deemed excessive and relief will not be restricted. In determining what is an appropriate benchmark, the seniority of the employee may be taken into account. Large organisations with favourable corporate rates at expensive hotels may, however, be disadvantaged by this.
It is not clear from the Tax Bulletin whether relief for the cost of any accommodation that passes the hotel test may still be restricted if part of it does not relate to business requirements. It could be argued that if a four-bedroomed house is provided to an expatriate with two children at a cost of £25,000 per annum but the cost of appropriate hotel accommodation for a single person was £26,000 per annum, there should be no restriction in the amount of relief.
The Inland Revenue also indicates that furniture may be provided and no account need be taken of accommodation provided at weekends and during short holidays or other short non-working periods throughout the assignment.
General subsistence
The costs of travel between the temporary accommodation and the temporary workplace are deductible as are the costs of food, drink, utility bills and 'personal expenditure attributable solely to the business travel'. Personal incidental expenditure may also be reimbursed under the rules outlined in section 200A, Taxes Act 1988.
Means of giving relief
The machinery for obtaining relief should be familiar to most employers. The Inland Revenue differentiates between 'round sum allowances' and 'scale rate payments'. Round sum allowances are used frequently by expatriate employers, most often to provide housing assistance by means of a cash housing allowance. The Inland Revenue reminds us that if such an allowance is 'clearly meant to do no more than reimburse the employee for the actual cost of accommodation or subsistence', it will allow the employer to pay it without deduction of pay-as-you-earn.
Permission for this treatment should be formally sought from the Inland Revenue. The amount should be reported on form P11D and declared on the tax return with a deduction taken for the actual allowable expenditure incurred by the employee. Employers may also not account for National Insurance on the payment if 'a specific and distinct business expense is identified in the allowance'.
'Scale rate payments' typically take the form of per diem allowances. Where these have been 'calculated on a scale intended to do no more than reimburse the employee for business expenses' deductible under section 198, Taxes Act 1988, the Inland Revenue will continue to grant full dispensations upon application by individual organisations. However, it has stated that it will not publish a generic, multi-industry set of per diems as is available in the United States, apparently on account of the cost involved.
The benefits of a dispensation are well known as it removes the payments from the tax compliance process altogether. If the employee incurs deductible expenditure over and above this amount it may be claimed on his tax return. If his expenditure is less, he is lucky (or thrifty!).
The Inland Revenue's comments in the Tax Bulletin on the mechanics of granting the relief are not in any way novel. But they serve as a useful reminder for companies with expatriates both inbound to and outbound from the United Kingdom that adapting a dispensation aimed at domestic employees for full use in respect of expatriates can make life much easier for all involved.
Nicholas Yassukovich is a manager in Arthur Andersen's Human Capital practice. He is indebted to Graham Atkins for his help in reviewing this but the views expressed in this article are his own and do not necessarily reflect those of the firm. He can be contacted on 0118 9563417 and at nick.yassukovich@uk.arthurandersen.com.
