40% rule for permanent workplace incorrectly appli

40% rule for permanent workplace incorrectly appli

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I've been asked to look at our expenses policy and I think some staff may have fallen foul of the 40% rule.  We have 2 offices. Usually each person is a assigned a base office and any travel they make to the other offices is reclaimable.  I have, however found that some employers work 3 days per week in their "base office" and 2 days per week permanently in the other office.  Therefore they are spending 40% of their time in one office but reclaiming their travel costs.  The other office doesn't meet the definition of a temporary workplace.

If I am correct that the expenses are ordinary commuting and not reclaimable who is responsible for the incorrect deduction of PAYE on these costs?

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By Accountant A
21st Jan 2019 11:11

blackadder wrote:

who is responsible for the incorrect deduction of PAYE on these costs?

I'm guessing it's the employer.

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By Tax Dragon
21st Jan 2019 12:42

Seems a good guess to me. S289A(2) and (3) put an onus on the employer to consider the position. HMRC, not unreasonably, says, “this is a process that the employer can undertake in real time” (see EIM30210). The precursor to that sentence (“employers [must] satisfy themselves at the time of making the payment [without tax] that the expense would be fully deductible”) hardly seems surprising or controversial.

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By Accountant A
21st Jan 2019 13:13

Tax Dragon wrote:

Seems a good guess to me.

Or sarcasm. One of the two, for sure.

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By Tax Dragon
21st Jan 2019 13:20

Probably (6/7) both.

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By Duggimon
21st Jan 2019 11:43

They both sound like permanent workplaces to me, regardless of what percentage is spent at either. If employees work between the two offices indefinitely as their regular roles, the "40% rule" is never considered, see EIM32075.

I would agree that the employer is responsible for the PAYE and NI that should have been deducted from the payments made to employees, but was not.

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By Vile Nortin Naipaan
21st Jan 2019 11:48

The 40% "rule" isn't a rule of law, it's HMRC "rule" of thumb.

Regularity doesn't necessarily make a workplace a premanent workplace either (which is what EIM32075 says).

See the views of the enlightened here (if you have access):

https://www.taxation.co.uk/Articles/2018/04/10/337829/readers-forum-patt...

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By Vile Nortin Naipaan
21st Jan 2019 11:49

And if you don't have access you'll have to put up with the 5h1t formatting here:

Readers' forum : Pattern recognition
10 April 2018
The meaning of ‘workplace’ for the purposes of claiming travel expenses.

We are advising employees who travel as part of their role and are required to attend various depots around the country. These trips are regular, often weekly or monthly, and are a necessary part of their jobs.

For example, an employee might be based at office one but be required to attend office two every Tuesday, office three each month for a management meeting and then fly to Scotland for three days each month to supervise staff at office four.

The difficulty we have is that, under HMRC guidance, it appears all these offices will be deemed permanent workplaces because the employees will be attending them regularly rather than temporarily. Their attendance is frequent, follows a pattern and will be for the duration of their employment. Therefore, as we understand it, all of these locations will be apermanent workplaces, meaning employees cannot reclaim their travel costs for attending locations two, three and four.

Are we interpreting HMRC’s guidance correctly given the result is unnecessarily harsh. We would also appreciate any pointers to guidance or cases that support our contention that these offices should not all be permanent workplaces. This problem could result in staff leaving if they are forced to incur their own travel costs.

Query 19,145– Wanderer.

Reply by Bramble
Subject to the rules applying to approved mileage allowance payments (AMAP), reimbursements made by employers to employees for travel and related subsistence expenses may be taxed as earnings under ITEPA 2003, s 62 or, more likely, be treated as earnings by s 72 (see HMRC’s Employment Income Manual, EIM10000, EIM00520 et seq and EIM20601).

Generally, if the payment for travelling expenses does no more than reimburse the cost incurred for which a deduction would be given under ITEPA 2003,
s 337, that payment is not earnings within s 62. However, the payment is treated as earnings by s 72. If a payment for travelling expenses is earnings or treated as such, a director/employee may be entitled to a deduction under s 337 or s 338. This is reiterated at EIM10010 which covers travel between multiple places of work. More commentary is at EIM32360 and EIM20603. Further, a workplace (as defined by s 339) is established if the employee performs substantive duties there. HMRC’s guidance on employee travel expenses is at EIM31800 et seq.

There are two types of workplace – permanent and temporary. A permanent workplace is one the employee regularly attends in the performance of the duties of the employment (‘duties’) and is not a temporary one. A temporary workplace is one the employee regularly attends in the performance of the duties to perform a task of limited duration or for some other temporary purpose. A place is not treated as temporary if the employee’s attendance is during continuous work at that place lasting more than 24 months or the period for which the employee is likely to hold the employment (or most of it) (see s 339 and EIM32065 to EIM32080, EIM32140 and EIM32150).

There is no tax relief for ordinary commuting; in other words, travel between the employee’s home and a normal (permanent) workplace (s 338(3)). Tax relief is available for the costs of travel between home and a temporary workplace (and related subsistence costs).

Wanderer’s clients typically have multiple workplaces they are required to attend on regularly and frequently. I assume that such travel is from home rather than from one office to another. The crux of Wanderer’s query is whether any of the workplaces can be shown to be temporary (and therefore not permanent) and so eligible for relief.

ITEPA 2003, s 337 to s 339 provide for two separate rules for the relief of travel expenses: travel in the performance of the duties; and travel for necessary attendance. The first rule is now relevant only to travel between workplaces, travelling appointments and some travel between a home workplace and work (see EIM31650, EIM31800, EIM31805, EIM32000 and EIM32350 and related links). As mentioned earlier, home-to-work travel is not deductible if it merely puts the employee in a position to perform the duties rather than actually carry them out, as supported by various cases (listed at EIM32356). However, there are some exceptions to the rule. These include travel from home to a temporary workplace (see EIM32000) and a travelling appointment, such as a service engineer or commercial traveller (see EIM32366).

Each of Wanderer’s clients will need to establish which, if any, of the offices they attend are temporary so we should look at the related guidance. As noted, a temporary workplace is one the employee regularly attends in the performance of the duties for the purpose of a task of limited duration or for some other temporary purpose. If a workplace is capable of being a temporary workplace, further considerations must be given to the rules about limited duration, fixed-term appointments, depots/bases and areas.

An employee’s attendance at a workplace is regular if it is frequent, follows a pattern or is where the employee normally goes to work for all or nearly all of the period the individual is likely to hold that employment. HMRC regards ‘nearly all’ as 80% or more. The proportion of an employee’s time spent working at one workplace is one of several factors in determining whether it is permanent. Even if the employee attends the workplace only once or twice a week, if it is on a regular basis the workplace may still be a permanent one (EIM32070).

Limited duration means up to 24 months
so that if an employee attends the workplace in the course of a period of continuous work that lasts, or is likely to last, more than 24 months, the workplace is not temporary and so is permanent (s 339(5) and (6)). A period of continuous work is a period over which the employment duties are performed to a significant extent at the workplace. HMRC treats duties as performed to a significant extent at a workplace if that is where the employee spends 40% or more of their working time (EIM32080).

Temporary purpose in s 339(3)(b) means regular attendance at a workplace and performance of duties that are not of limited duration may not make it a permanent workplace if the purpose of each visit is temporary. It is likely to be for a temporary purpose if the visit is arranged for a particular reason rather than one of multiple visits to the same workplace to continue a particular task (EIM32150 and examples at EIM32151 to EIM32154).

The fixed-term appointment rule broadly means that, even if the period of continuous work lasts or is likely to last, less than 24 months and so of limited duration, the workplace will be a permanent one if attendance is during a period of continuous work that can be expected to last for (nearly) all of the employment period (EIM32125).

The depots/bases rule in s 339(4) means that a workplace will be permanent if the employee’s regular attendance is because it is the base from which the duties are performed or at which tasks are routinely allocated. The examples at EIM32161 to EIM32164 show this.

The area rule in s 339(8) simply treats a geographical area as the permanent workplace where the duties are by reference to that area, an area manager would fall under this (EIM32190).

Assuming a five-day working week what does this look like for the employee cited in the example? Office one is clearly a permanent workplace since the employee is based there. Office two is attended every Tuesday, which is 20% of the working week. This is not significant but it is regular and expected to last throughout the employment. However, if the employee’s work at office two is for a temporary purpose, that office is a temporary workplace. Office three is visited each month for a management meeting and would seem to be a temporary workplace following the examples at EIM32152 and EIM32153. Office four in Scotland is attended monthly for three days, which is 15% of the working time over four weeks. The purpose of the visit is to supervise staff. It would seem to be part of a continuous process carried out over numerous visits and is likely to be a permanent workplace.

Wanderer says the client employees are unable to reclaim their travel costs for attending any of the other three locations but I am unclear whether Wanderer is referring to a reclaim from the employer, namely expenses reimbursement, or claiming a deduction for tax purposes. One would certainly hope that the employer reimburses its employees’ travel expenses incurred as a result of their employer requiring attendance at various locations and, accordingly, the employees are no worse or better off once they are reimbursed. I cannot therefore understand why there is a potential problem with staff leaving unless the employee is not reimbursing the employees’ legitimate expenses.

Reply by George Attazder
I don’t think the employees should be made to pay travel expenses that the employer requires them to incur simply because HMRC considers them to be costs of ordinary commuting. The risk, to my mind, is that the employer may need to treat them as pay and account for PAYE and National Insurance on the payments on a grossed-up basis.

In its guidance, HMRC has taken a couple of pages of legislation and written a ream of interpretation using simplified examples, which at its worst completely misrepresents what is being interpreted.

The underlying issue is that travel expenses are not a qualifying expense of the employment if they constitute private travel and ordinary commuting (or a journey that is substantially ordinary commuting) constitutes private travel. A journey is ordinary commuting for this purpose if it is travel between the employee’s home and a permanent workplace.

The legislation says a permanent workplace is one that is not a temporary one (ITEPA 2003, s 339(2)); and a temporary workplace is one that the employee attends either to perform a task of limited duration or for some other temporary purpose (s 339(3)).

The only place in the legislation that regularity is mentioned is in s 339(4), which I will come to, and in my view a purpose that arises with regularity can still be a temporary one. The alternative of performing a task of limited duration should also not be overlooked.

Supervising the staff at office four for three days each month, for example, is a task of limited (three days) duration, and regularity doesn’t come into it, in my opinion. Likewise, the monthly management meeting at office three is a task of limited duration.

It is also arguable that working every Tuesday at office two is a temporary purpose, even though the purpose arises on a regular and predictable basis. Being one day a week, this attendance does not then fall foul of HMRC’s 40% rule of thumb that it applies for the purposes of s 339(5). I suspect that HMRC will disagree on this temporary purpose point though.

The management meeting could fall foul of s 339(4), which treats a workplace as a permanent one rather than a temporary one if the employee attends it regularly and it is either: one that forms the base from which the employment duties are carried out (although this would seem to be office one); or one at which the tasks to be carried out are allocated.

Ultimately, the employer will need to take a view and be prepared to take the matter to tribunal on any challenge from HMRC.

A closer look ...
Travel expenses and temporary workplaces

The replies to ‘Pattern recognition’ consider travel costs to various workplaces. Simon’s Taxes explains that a deduction is allowed for travel expenses if, among other things, the expenses are attributable to the employee’s necessary attendance at any place in the performance of the duties of the employment, as long as this is not ordinary commuting or private travel. So the cost of travel direct from home to a temporary place of work is allowable.

A ‘workplace’ is where attendance is necessary in the performance of the duties of the employment. A ‘temporary workplace’ is a place that the employee attends for the purpose of performing a task of limited duration or for some other temporary purpose in the performance of their employment duties. A place is not a temporary workplace if the employee attends there in a period of continuous work that lasts, or is likely to last, more than 24 months (or is for all or almost all of the remainder of the time for which the employee is likely to hold the employment).

A period of continuous work at a place means a period in which the duties fall to be performed there to a significant extent, taking into account all the duties of the employment over the whole period. HMRC considers that duties are performed at a place to a significant extent if the employee spends 40% or more of their working time there.

A ‘permanent workplace’ means a place that the employee regularly attends to perform their duties and is not a temporary workplace. A place that forms the base from which the duties are performed or is a depot at which the duties are allocated is treated as a permanent workplace, as long as the employee attends it regularly.

Most employees have only one permanent workplace, but if an employee regularly visits another workplace over more than 24 months and spends at least 40% of their time there, it is probable that both places are permanent. On the other hand, some employees may have no permanent workplace; for example, if their duties are all carried out at the premises of clients and they receive their employer’s instructions by telephone.

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Replying to Vile Nortin Naipaan:
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By Tax Dragon
21st Jan 2019 12:42

All very interesting, but the OP has told us the answer to the question you are implicitly raising, has s/he not?

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By Vile Nortin Naipaan
21st Jan 2019 12:50

No. The OP has assumed an answer to a not completely defined question that arises from their (and their employees' specific circumstances). Once the question is more properly (and completely defined) I am "implicitly" suggesting (it ain't a question) that the assumption is probably incorrect.

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By Tax Dragon
21st Jan 2019 13:07

You go so far as to say “probably”? I’d put it at one in seven.

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By Accountant A
21st Jan 2019 13:30

It's beyond ridiculous that the correct tax treatment of travel expenses is so difficult to determine. What we need is a body to look into things like this. We could call it the "Office of Tax Simplification".

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By Tax Dragon
22nd Jan 2019 07:16

Possibly if the sections were interpreted sensibly, it would not be so hard. It's possible to break any job down into "tasks" of limited duration - lay this brick here, lay that brick next to it; put this number in this box on the tax return, add those numbers together and put the answer in that box.

Even if you're going to argue (and defend) an over-literal interpretation, you have to read the words in context.

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By Accountant A
22nd Jan 2019 19:27

Tax Dragon wrote:

Possibly if the sections were interpreted sensibly, it would not be so hard. It's possible to break any job down into "tasks" of limited duration - lay this brick here, lay that brick next to it; put this number in this box on the tax return, add those numbers together and put the answer in that box.

Even if you're going to argue (and defend) an over-literal interpretation, you have to read the words in context.

What is a "a task of limited duration"?? Any task in any job is of limited duration! If accountants struggle how are employers and employees supposed to easily adjudicate? It's crazy.

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By Vile Nortin Naipaan
23rd Jan 2019 10:46

I think the "task", and the "limit" of its "duration", needs to be considered in the context of the "attendance at a place" for the purpose of performing it. I agree with Tax Dragon; HMRC have taken 2 pages of straightforward legislation and written 100s of pages of obfuscation on it, with everybody then trying to figure out if their facts align better with the Bert example or the Ernie example.

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