Subsistence and Travel Expenses
It is very common for employees to work away from their normal place of work and businesses often pay for meals and accommodation while employees are away from their normal place of work. In addition, some businesses provide an extra stipend or ‘inconvenience payment’ to their employees.
The VAT recovery position of such payments can be complex, and we will cover many of the scenarios that businesses face when paying employee expenses. To add to confusion the VAT rules can vary depending on the country. This note covers the UK VAT position.
Employees often spend days away from the office either visiting customer/client premises or on training courses that include overnight accommodation. If employees stay in hotels, VAT is charged on the cost of the accommodation. This VAT is recoverable (subject to the normal rules). It is common for invoices from hotels to be addressed to the employee and this VAT is also recoverable provided the hotel stay is for a business purpose. It follows that VAT on other items shown on the hotel such as meals would also be recoverable. In contrast if items on the invoice do not have a business purpose for example, a spa treatment the VAT would not be recoverable.
Where employees work away from home or their normal place of work and their employer pays for meal costs, any VAT on invoices is recoverable. This also covers cases where the invoice is made out to the employee, or where a less detailed tax invoice is provided to the employee. A less detailed tax invoice can be issued for supplies of less than £250 and need only show the name, address and VAT number of supplier, the date and tax point, a brief description of the goods and the VAT inclusive total for each rate of VAT. Retail till receipts often double up as less detailed tax invoices and the VAT can be calculated by applying the VAT fraction (1/6th when the VAT rate is 20%).
The UK tax authorities allow VAT to be claimed on self-employed contractors’ meal and subsistence costs in the same way that employees’ costs can be recovered. A condition of this concession that the contractors must have the same level of entitlement as employees.
The risk with meals is that where customers or non-employees are also included within the meal, the meal might be considered as business entertainment and VAT is not recoverable in respect of business entertainment.
Sometimes an employer may provide a fixed rate per day to an employee who is required to work away from home to cover accommodation and meal costs. Since the expenses do not relate to specific supplies no VAT is recoverable in respect of a flat rate paid to employees. If an employer pays a proportion of accommodation or meal expenses, then VAT to the extent of the amount paid by the business is recoverable.
The supply of most forms of public transport (train, bus and plane) are zero-rated, so there is no scope to recover VAT.
A taxi journey is likely to be standard rated. Many taxi drivers are self-employed so it is possible that they are not VAT registered if they trade under the VAT registration threshold. It is therefore important to check to see if the invoice / receipt issued by the taxi driver shows a VAT number. If it does then it should be possible to recover the VAT if the journey was for a business purpose.
It is worth remembering that tips freely given by passengers are outside the scope of VAT.