Mark McLaughlin

Introduction

Expenses of a company director working away from home is the subject of this month's query, by 'tom7000'. In particular, hotel costs of overnight accommodation are generally an allowable business expense of the employer for tax purposes, and not a benefit-in-kind for the employee. However, what if the employer rents a room in a house for the employee to stay instead? In addition, the reasonable costs of meals taken with an overnight stay are normally outside the scope of a benefit-in-kind charge. But what is the position if the employer pays for the employee's groceries, to enable the individual to eat at the rented accommodation, rather than eating out at a restaurant? Does it make any difference if the employee is the managing director and controlling shareholder of the company? 

Query from TaxationWeb visitor ('tom7000')

Billy is a civil engineer. He lives in a 7 bedroom house with stables and a pool in Guildford. He is a director and shareholder of his own company. He is the only employee. He has won a 6 month contract in Manchester.

He doesn't want to stay in a hotel when he's in Manchester as it's going to be expensive, so his company has rented a room in a house for 6 months to assist him with the proper performance of his duties.

1) I think the rent of the room is tax deductible in the company and not a benefit in kind for him - do we agree?

2) The company wants to pay for Billy's groceries....and we are not sure of this....if he was staying in a hotel and buying food at pizzahut then I would bang the bills through as subsistence...but is it ok to put the Tesco bills through?

Editor’s Comments

On the face of it, it would be reasonable to assume that the expense of renting a room in a house as opposed to staying at a hotel should be an allowable expense, and not be a benefit-in-kind (BIK). But in McKie (HMIT) v Warner [1961] 1 WLR 1230, an employee was required to work away from home by his employer, who leased a flat at a rent of £500 a year for the employee to stay. The Court held that the difference between the rent payable by the company (£500) and the employee's contribution to his employer for the accommodation (£150) was taxable on the employee. However, HMRC's Employment Income Manual (at EIM 32505) indicates that this case supports the view that 'extra' living expenses incurred as a result of working away from home is a benefit. It also states that if the cost of travel to the workplace is deductible, then related subsistence and accommodation should be deductible as well.

In his response to the query (see below), 'Kingmaker' also refers to the Employment Income Manual (at EIM 31815) in support of the view that the grocery costs incurred are arguably not a benefit, provided that they represent reasonable subsistence costs. However, opinion is divided on this point. Reference should also be made to EIM 11300- (accommodation), EIM 31800- (Travel) and EIM 10000.

Forum responses included those reproduced below

'N Roberts' commented:

Hi Tom7000,

I agree with you that the room won't be a BIK because I am of the opinion that the accommodation is job-related.

However, I am unsure of the second one. I would err on the side of caution and say that the groceries would be a BIK. This is because any bills paid for by the employer in relation to the job-related accommodation i.e. gas and electric would still be deemed to be a BIK (capped at 10% of his earnings). If Billy was living at home in Guildford or in Manchester he would still need to eat and as such incur the cost of buying groceries as well as gas and electric.

What are your thoughts on this?

'tom 7000' replied:

There are 7 qualified accountants in the building - ACAs ACCAs and CTAs etc and we are all scratching our heads on this one.

but I think your point on the utilities is good and should scoop up the groceries if we are going to be practical - but when was tax ever that?

'Daniya' commented:

I would have to disagree on the second point regarding the issue of grocery being BIK. What the company should do is provide £x for subsistence for a week to the employee.The employee can use that money to buy from tesco or buy sandwich during the week. As long as he/she provides a receipt to the company, the company can claim as a tax deductible item. NO BIK!!!!!!

'N Roberts' replied:

I disagree with your comments.

Cash remuneration would under s 62 ITEPA 2003 be regarded as earnings.

The cost of acquiring groceries would be a BIK. Section 336 of ITEPA states that a deduction would be allowed if:

"the employee is obliged to incur and pay the expense as a holder of the employment..."

Billy would have incurred the grocery bill had he been living in Guildford or in Manchester.

The reason this is a BIK and the accommodation is not is because he would not have incurred the cost of the accommodation had he been residing in Guildford.

'Daniya' replied:

There seems to be fine line here between subsistence & groceries...when I said pay £x amount for subsistence per week, i.e say £15.00 a day allowance, £15 x 7 = £105 per week.
 
To say groceries would mean any amount. As an employee he/she would be spending evening, therefore an allowance for subsistence is applicable.
Again I would disagree, the allowance given per week will not be BIK.

'N Roberts' replied:

I'm not sure where the £15 a day allowance came from? The taxpayer has still received extra money from his employment.

I still maintain my previous contention that the cost of providing groceries is not an expense which is wholly, exclusively and necessarily for the purpose of the employment. For the avoidance of doubt, this expense would have been incurred anyway whether he was an employee or not.

I think given the taxpayer's circumstances (being a one man band limited company) we should err on the side of caution this is because this expense could flag up an enquiry and before you know HMRC are investigating him for IR35. It's all about damage limitation and we should ask ourselves: would HMRC realistically allow an individual to claim his grocery bill through his company? If the answer is yes then wouldn’t a large proportion of people set up a limited company to benefit from that generous relief? There has to be a reason why this is not allowed and i believe that the reason for this is outlined within my earlier response.

'King Maker' commented:

My initial view is :

1. Rent - allowable, so long as it reasonable and in line with local hotels.

2. Groceries - allowable on the basis that it equates to reasonable subsistence. I believe HMRC would adopt a sympathetic stance, provided the amounts did not exceed reasonable meal costs.

HMRC's Employment Income Manual (EIM) at EIM31815 et seq. gives its interpretation of Travel & Subsistence deductability :

http://www.hmrc.gov.uk/manuals/eimanual/eim31815.htm

'N Roberts' commented:

Hello King_maker,

I appreciate that there are inspectors out there who would be sympathetic. But In my experience, there are also inspectors out there who are not sympathetic, and to rely on their good nature does not provide a good foundation for advice to a client.

I looked at the reference that you made to HMRC's manual and I have cited a passage from their manual:

"To qualify for a deduction the subsistence costs must be attributable to the business travel in the sense that they are costs incurred in the course of the journey that are additional to any costs that the employee would incur if it were not for the business travel. You will need to make sure that the costs are genuinely attributable to the business travel and not attributable to something else, as in example EIM31817 or example EIM31818."

It’s on this basis that I consider that some inspectors may disregard such an expense.

'King Maker' replied:

N Roberts,

Yes, there can be unsympathetic Tax Inspectors, but the more narrow minded ones are often lower down the totem pole. A referral to more senior personnel is usually successful. Be prepared to go to the General Commissioners, if necessary - a claim for my costs usually focuses the Inspector's mind (Special Commissioners only).

I think the answer is contained further in EIM31815 :

"Once it is accepted that the employee has incurred allowable subsistence expenses you do not need to take into account the costs saved as a result of the business travel. For example, if the employee needs to eat in a restaurant while on a business trip you can permit a deduction for the full cost of the meal and should not make any adjustment for the costs saved by not eating at home."

I cannot see a logical reason why "subsistence" has to be restricted to restaurant/hotel meals, and cannot extend to the individual purchasing the raw materials and making the meal himself/herself - especially if the costs are less, although flying in Marco Pierre White might be disallowed.

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