Tax Free Travel and Subsistence Expenses
With Revenue issuing revised guidance in recent years the issue of Travel and Susistence expenses has become very restrictive, overly so. The various Institutes through TALC hav emade representations and there is presently a consultancy process underway and this area is not as one would imagine
See Sunday Business Post article from 2 August 2015 by Brian Keegan (Director of Taxation with Chartered Accountants Ireland)
There are few descriptions in the business world which offer such consolation. Retirement isn’t so bad if the lump sum you receive is tax free. The flight delay becomes bearable if you can while away the time in the tax free shop. Staff get over the nuisance of having to use their car for work purposes. After all, isn’t the mileage tax free?
The Revenue Commissioners are not in the business of offering consolation. When it comes to expenses, “tax free” is just a shorthand description for amounts which Revenue permit employers to pay without operating PAYE. Strictly speaking, if you are paid expenses in your job, the employer should operate PAYE on them, and then you should claim back the tax which was deducted. In practice that doesn’t happen, mainly because Revenue would be swamped with refund claims. Instead, and in very strict circumstances, Revenue permit employers to refund expenses directly to the employee tax free.
Tax free expenses
The expense tax rules date back decades, and are very tough. To qualify for a tax-free treatment, you have to be able to prove that the payments in total are for no other purpose than for the employment, and are necessary for it. In particular, you're not usually allowed claim for the cost of travel from your home to and from your work.
These rules date from an era when business travel was infrequent, and international business travel was very much the exception rather than the norm. The rules were last modernised about 20 years ago, but that reform was limited to taking out references to travel expenses arising from keeping a horse.
Around Budget time last year, the Minister said he would review the expenses tax rules again, and a public consultation on the matter was launched a few days ago. Why now? I think the timing has to do with the issue of expenses paid to some company directors.
Many companies engage non-executive directors, individuals with a particular knowledge of the company's business area, or of good corporate governance. Sometimes they are appointed for prestige reasons. Having a high-profile name on a company board can be good for corporate image and sales. Frequently they will have been appointed by the company owners, particularly if the company concerned is a subsidiary of a group headquartered overseas.
By definition, these directors do not work in the company – they are non-executive. Under tax law they are deemed to be employees and for PAYE purposes are treated in the same way as anyone on the shopfloor. So their travel costs to and from board meetings may not be paid without operating PAYE.
These travel costs aren’t usually an issue, but if you're travelling a distance and have to stay over, or flying in from abroad, the travel costs and therefore the tax consequences become significant. That’s a bit inconsistent for a country like Ireland which works so hard to get Foreign Direct Investment, but then charges income tax on the foreign travel costs of the investors.
It’s also inconsistent because as things stand, not all non-executive directors are treated the same way. If you're involved as a director in the voluntary or not-for-profit sector, and the expenses are fairly minor, Revenue do not apply the charge to tax. The travel expenses of many directors of state boards are also tax free.
This anomaly provides some justification for a review of the tax free system of expenses, but no Department of Finance review would be complete without some very awkward questions. Top of the awkward list is the status of the subsistence allowance. A subsistence allowance is an unvouched amount paid to an employee to reimburse an overnight stay or an extended absence from the normal place of work. Employees can spend or save their subsistence allowance as they choose. Subsistence allowances are common enough in the public sector, but less well known in the private sector. Their acceptability for tax purposes may be abolished as a consequence of this review.
Government is rightly wary of the consequences of broadening the tax free expenses regime, because government depends on income tax and income tax collection depends largely on employers operating PAYE correctly. Anything which could seriously dilute the PAYE take will be avoided at all costs. As against that, employees incur expenses in their work and deserve straight refunds of the money they legitimately have to spend doing their job.
The difficulty with non-executive directors which prompted this review is one instance of the anomalies arising from having a mobile workforce in organisations with interests across the world. Work is no longer defined in terms of somewhere you go, it is something you do. The tax system should reflect this. If people can work from home, is a blanket ban on all expenses of travel from home (where they were working) to a customer site (where they continue on working) still appropriate? The answer is probably not. But then the problem becomes one of the extent to which expenses can be paid tax free, not a simple yes or no as is often the case with the current system.
The answer to this problem may lie in the degree of control which an employer exercises over the payment of tax free expenses. The test that the payment is wholly, exclusively and necessarily made in fulfilling the work to have a tax free status may need to be adjusted. This test favours concerns over the out of pocket costs to the employee rather than the commercial concerns of the employer.
A brand new set of rules can’t and won’t be formulated, if only because of fears surrounding the exchequer impact. However changes which facilitate commercial concerns should be prioritised and made. Such changes will not necessarily result in a loss of tax revenue.
In fact some employers might be quite happy with the abolition of tax free status for unvouched, fixed or round sum amounts and prefer to reimburse on vouched receipts. Few would quibble with any attempt to clarify some of the current anomalies and ambiguities surrounding the payment of expenses and their tax status.
Government must however avoid the temptation to increase the tax take by the back door. That wouldn’t be a consolation for anyone."
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