Relocation Expenses A tax guide

Transcription

1 Relocation Expenses A tax guide The Friendly Accountants Chartered Accountants Chartered Tax Advisers Directors: Lesley Ward BSc FCA Richard Baldwyn ATT CTA The Friendly Accountants is a trading name of TFA Accountants Limited Registered in England Number: Registered Office: Arena Business Centre, Holyrood Close, Poole, Dorset, BH17 7FJ t: e: richard@thefriendlyaccountants.co.uk

2 Disclaimer This guide is designed to alert you to some of the major issues you should be considering. It is not a replacement for professional advice tailored to your precise needs and circumstances. You should always seek the advice of a suitably qualified professional before acting on any of the advice. And if you would like to speak to us about any of the issues covered in this guide, please feel free to give us a call or drop us an .

3 Contents 1. Overview Relocation costs... 2 a) Overview... 2 b) Paid by company... 3 c) Paid personally Temporary workplace relief... 4 a) What is temporary workplace relief?... 4 b) Accommodation expenses... 5 c) Subsistence expenses... 5 d) Mileage allowance... 6 e) The new rules from 6 April Other issues... 7 a) Renting out your home Additional costs for Non-UK nationals and UK expats... 8 a) Flights to and from the UK... 8 b) Visa costs Risk levels of each approach... 9 a) Relocation only... 9 b) Applying temporary workplace relief only... 9 c) Claiming both relocation and temporary workplace relief... 9 d) HMRC s likely argument e) The safest option Summary... 11

4 1. Overview This guide seeks to point out the possible strategies for claiming tax relief on expenditure where you have been temporarily assigned to the UK from your home country in order to perform the duties of your employment. Please note that in terms of risk you need to consider the likelihood that HMRC may raise an enquiry into any costs claimed and, if they do, whether they will be successful in any challenge they make. If any claim is challenged by HMRC and they are successful in their argument, then in addition to any corporation tax due, the company may also be liable to following penalties dependent on the type of error HMRC considers it to be: Type of failure Non-deliberate Deliberate but not concealed Deliberate and concealed Maximum penalty payable 30% of the potential lost revenue (ie corporation tax) 70% of the potential lost revenue (ie corporation tax) 100% of the potential lost revenue (ie corporation tax) Obviously, should the need arise, we would argue vigorously that the error was nondeliberate and an innocent error and therefore a penalty should not be charged. Please understand that this guide is simply making you aware of the potential downside that might arise should you decide to pursue any of the strategies below and what might be the outcome if the costs were subject to an enquiry by HMRC and successfully challenged by them. Page 1

5 2. Relocation costs a) Overview As a starting point the UK tax rules stipulate that the first 8,000 of an employee s qualifying removal expenses are exempt from tax. Note that the exemption applies per employee, so in theory if there are two employees of the same company (for example a husband and wife where both are directors and on the payroll at the time of the relocation), the exemption would be 16,000 ( 8,000 x 2). If the removal expenses that are paid/reimbursed exceed 8,000 then the excess is taxable on the employee. It would also be necessary for the company to pay Class 1A National Insurance (currently at 13.8%) on the excess. In order to qualify for the 8,000 exemption above, a number of conditions need to be fulfilled as follows: The expenses must have been incurred as a result of a change in residence, typically either by taking up a new employment, or as a result of a secondment by an existing employer. All of the expenditure was incurred by the end of the tax year that you arrived in the UK to take up the new employment. So for example, if you took up employment on or around August/September 2017, this would be the tax year ended 5th April The expenses must be paid either directly by your employer or subsequently reimbursed to you by your employer. The employer in your case will be your limited company which would have been in existence prior to you coming to the UK to take up an assignment. Please note you cannot simply pay these costs personally and then claim a tax deduction against your personal income. The expenditure incurred must be qualifying removal costs as defined in the taxes legislation. Qualifying removal costs include: the cost of transporting belongings; travelling and subsistence; replacement of domestic goods (usually white goods which aren t considered to be transportable) this list is by no means exhaustive. If the removal expenses paid/reimbursed are within the 8,000 exemption then the company is not formally required to report to HMRC details of any removal expenses paid/reimbursed to its employees via the annual P11D form. Page 2

6 The cost of any travel, flights or hotels or any other temporary accommodation as part of the process of taking up your new employment would potentially fall within the category of qualifying removal expenses. b) Paid by company Provided the removal costs are within the 8,000 (or if there are two directors/employees), any payments made to you on behalf of the company (your employer) are potentially tax free in your hands and the company should be able to claim a corporation tax deduction for these costs. It is simplest to have the company pay these expenses wherever possible. c) Paid personally If, for reasons of practicality, you pay for your relocation costs personally, it will be a question of your company reimbursing you for those costs. It is therefore important that any reimbursement is correctly posted in your bookkeeping system, for avoidance of future doubt. Page 3

7 3. Temporary workplace relief If the secondment is more indicative of a temporary move to the UK (for example you retain a main residence in your home country or you do not transport all your belongings with you), then a claim for temporary workplace relief will usually be more appropriate. a) What is temporary workplace relief? Historically HMRC have usually allowed a tax deduction for the cost of travel and subsistence incurred by an individual travelling to and from a temporary workplace. This relief is commonly referred to as Detached Duty or Temporary Workplace relief. To qualify for this relief an individual must be working away from their normal work location for a period of no longer than 24 months. A temporary workplace is defined as one at which the employee attends: 1. In the performance of the duties of the employment, 2. For the purpose of performing a task of limited duration, or for some other temporary purpose. The temporary workplace also cannot be the base from which, crucially, all duties are handed out and performed. Just to clarify the 24 month rule, HMRC also consider that a workplace is not temporary if: Any of the following apply: attendance at the workplace lasts more than 24 months or comprises all or almost all of the period for which the employee is likely to hold the employment where this period is less than 24 months or at any point during the period above when it is reasonable to assume that the majority of duties will in fact be carried out at the same workplace The duties performed there are significant (take up more than 40% of the employee s time) Page 4

8 So whilst a contract may be less than 24 months long and on the surface of it appear to qualify for temporary workplace relief, you should give careful consideration to the points above. b) Accommodation expenses Assuming you qualify for relief under the temporary workplace rules, then you are also entitled to claim relief for the reasonable cost of accommodation at or near the temporary workplace. There is no definition as such for reasonable cost though a pragmatic approach should be adopted. For example: Has a comparative been made between the cost of bed and breakfast/ hotel accommodation and residential lets within the locale of the temporary workplace? If so, is the cost of the residential let significantly higher than the equivalent cost of staying in a hotel or bed or breakfast? Are the terms of any rental agreement sufficiently flexible to permit cancellation at short notice? Is the agreement in the company s, rather than the individual s name? It would not be appropriate to claim relief tax relief on furniture or soft furnishings etc as this would not be typical of the accommodation costs claimed whilst attending a temporary workplace. c) Subsistence expenses Subsistence is usually tax deductible when it is incurred in conjunction with attendance at a temporary workplace (see heading above) - for example the cost of lunches and evening meals. However if expenditure is recurring and significant over a long-term period, this may come under close scrutiny from HMRC. If HMRC open an enquiry and it transpires that the expenditure has all been incurred whilst at work in the same location for all (or substantially all) the period of employment, it does not relate to a temporary workplace and is therefore not tax deductible. You must attend more than one workplace throughout the course of your employment (or at least genuinely expect to) in order to claim travel and subsistence. Page 5

9 Depending on where the duties of your employment are carried out, it may therefore not be advisable to claim everyday expenditure on subsistence where this relates to one workplace throughout the duration of your assignment. d) Mileage allowance Any mileage allowance paid to a director may only be a tax deductible expense for the company and tax free in the directors hands, provided: It relates to a business journey undertaken, for example, to and from a temporary workplace. It is paid within the prescribed limits - for cars this is up to 45p per mile for the first 10,000 business miles and 25p per mile thereafter. Any excess amounts paid over these limits will be taxable. e) The new rules from 6 April 2016 For many years the temporary workplace rules have, without doubt, been stretched by many companies, contractors, agencies and umbrella companies working around the system with overarching contracts. As a result, from 6 April 2016 HMRC have introduced new rules which when applied in certain circumstances (see below) will reclassify what may have been previously a temporary workplace as a permanent workplace, so that travel to that workplace will be treated as ordinary commuting. This means any accommodation, travel, or subsistence will not be tax deductible. These rules apply specifically to individuals who provide their personal services to a client through an employment intermediary. An employment intermediary is defined as an agency, a recruitment or employment business, an umbrella company, a managed service company (MSC), or (in your case) a personal service company (PSC). However these rules will generally only apply to a PSC where a contract is deemed to be caught by IR35. Where there is no regular base of operation (for example a salesman operating via a limited company) these rules are unlikely to apply. Even if your contract isn t caught by IR35, where you are operating via a personal service company you can expect this type of expenditure to be subject to a much greater level of scrutiny by HMRC than was the case previously, as they perceive this area is open to abuse. Page 6

10 4. Other issues a) Renting out your home If you choose to rent out your usual home whilst you are temporarily assigned elsewhere, it would be unwise to claim for any hotel or rental costs incurred when visiting your usual home. HMRC are likely to take the view that the decision to rent out your home is a personal choice and so any rental or additional travel costs incurred as a result of this decision would not be allowable. An example: John has a house he is buying in Southampton. His company second him to Edinburgh and rent a house for him there. John decides to let out his house in Southampton. When returning to Southampton to visit friends and family, John has to stay in a hotel. This cost will not be an allowable deduction as it is John s personal choice to stay in a hotel. Page 7

11 5. Additional costs for Non-UK nationals and UK expats a) Flights to and from the UK If you haven t been resident in the UK previously or for a number of years, you should be able to claim a deduction for the cost to and from your home country whilst on secondment to the UK - these costs could either be reimbursed to you or paid directly by the company. Only those flights required to get to and from your home would be allowed any flight costs incurred over and above this would not be allowed. So for example if you decide to visit another country en-route then the flight costs would not be allowed. There is no limit to the number of trips a non-uk domiciled (this could potentially include a UK ex-pat) employee or director can make to their home country in the first five years starting from the date of their first arrival in the UK - however family members are limited to two trips a year. b) Visa costs The cost of Visas etc does not fall within either relocation or accommodation costs and on the assumption that the Visa is necessary in order to take up employment in the UK, then your company should be able to claim these as staff costs. Page 8

12 6. Risk levels of each approach a) Relocation only If you have genuinely relocated to the UK to take up a new employment then claiming on the relocation costs up to 8,000 per employee/director would be the least risky. However, no costs should then be claimed for any accommodation or subsistence whilst on assignment in the UK. b) Applying temporary workplace relief only If you haven t relocated, then claiming all the costs associated with temporary workplace rules (including subsistence and travel) is a riskier approach then just claiming the accommodation costs which is less likely to present a red flag to HMRC. This is because your attendance at any workplace where almost all of the duties are performed could be regarded by HMRC as a permanent workplace. c) Claiming both relocation and temporary workplace relief Claiming both your relocation costs and your costs under the temporary workplace rules could be a risky strategy because they would be claimed via your personal company. HMRC are usually more relaxed with this type of scenario where an employee is temporarily seconded to the UK by a non-uk company which is not under their direction or control (in other words they are not a shareholder or director). Furthermore if removal costs are claimed this indicates that there has been a change in residence of a permanent nature and it would be difficult to perceive a situation where HMRC would accept that an individual was concurrently attending a temporary workplace and a permanent move had also taken place. Their argument would be that an individual cannot claim to have re-located to the UK on the one hand and on the other claim to be travelling to a temporary workplace (simply because you home is outside of the UK). Page 9

13 So their argument would be that your home has effectively shifted to the new location and that by claiming the whole of these accommodation costs, plus travel and subsistence whilst working at your base you are proverbially trying to have your cake and eat it too. In our opinion, ordinarily relocation costs are more justifiable and less likely to be challenged by HMRC. d) HMRC s likely argument If you did decide to adopt one or both of the above strategies (ie temporary workplace or relocation and temporary workplace) you should be mindful of HMRC s arguments against allowing a deduction for the above expenditure which are likely to be as follows: There is an element of personal choice in your decision to come to the UK and contract through a UK limited company, rather than as part of a compulsory transfer within a larger organisation. Where you are looking to double up on the removal expenses claimed above HMRC may question the validity of the role your spouse has in the company. e) The safest option It is inevitable that you will incur significant cost of living expenses whilst on secondment to the UK and naturally you would wish to claim tax relief on this expenditure to compensate for this and the potential lack of long-term job security. However if the relocation approach is not applicable, and claiming under the temporary workplace rule is a risky option (for reasons already explained above) then perhaps the safest route would be to claim a business proportion of your living expenditure (rent, council tax etc) by way of rental agreement with your limited company. If you are able to (and actually do) carry out a significant amount of the duties of your employment from home (which is your company s trading address) then it should be possible to claim a tax deduction on a proportion of these costs. Page 10

14 7. Summary Remember that in order for the company to be at risk of penalties and additional tax, HMRC would first have to raise an enquiry on any amounts included in the accounts. The risk of this happening is uncertain. However, not excluding the above, you are faced with the following options with various risk factors: Claim the relocation costs to the UK and a proportion of your UK accommodation costs as use of home least risky Do not claim any relocation costs, and claim the whole of your UK accommodation costs under the temporary workplace rules. Whilst this approach may result in a greater deduction, there is greater risk of this being challenged by HMRC. Claim both relocation and accommodation costs very risky and highly likely to be challenged by HMRC. Claim accommodation, travel and subsistence very risky and highly likely to be challenged by HMRC unless your contract falls within the definition of a temporary workplace (detailed above). Page 11