Appendix 1: Employees on secondment to the UK
(Adapted from an article in Tax Bulletin 50 - December 2000)
Under Sections 338 and 339 ITEPA 2003, an employee who attends a temporary workplace for a period of up to 24 months can obtain relief for the cost of travel to and from that workplace (see EIM32080). The amount of relief may include the cost of accommodation and subsistence attributable to attendance at that workplace. The rules are explained in Booklet 490, “Employee Travel: A Tax and NICs Guide for Employers”.
We have been asked to supplement the guidance in Booklet 490 by explaining our approach to benefits and expenses paid to employees sent on secondments that do not exceed 24 months. This article covers some issues that are particularly relevant for employees who are sent by an overseas employer to work in the United Kingdom. So the examples are drawn from those cases.
Where you are enquiring into the entitlement to relief of a non-domiciled employee, you should also consider Section 373 ITEPA 2003. EIM30052 deals with the interaction between Sections 338 and 373. There are illustrative examples at EIM35003
How to identify “the employment” of an individual for the purposes of Section 338 and 339 ITEPA 2003
Where an employee’s attendance at a workplace comprises all, or almost all, of the period for which the employee is likely to hold the employment, then it will not be at a temporary workplace for the purposes of Section 339, see Section 339(5) and paragraph 3.18 of Booklet 490. The place where an employee works does not of itself determine who is his or her employer. Nevertheless, when someone is sent to work at a particular site for, say, 18 months, it is always necessary to consider whether the secondment is part of the duties of a continuing employment or whether it involves taking up a different employment.
In most cases the position will be straightforward, for example where an employee’s contract of employment stipulates from the outset that the employee may be required to move from office to office for different periods in the course of the employment. But there will be circumstances where the position is less clear-cut.
Whether a particular secondment amounts to acceptance of a new employment has to be determined on a case by case basis taking into account all relevant factors.
Factors in favour of a new employment would include a separate contract with a different employer, a termination of the previous employment and a major change in employment duties from the previous employment.
Factors pointing to a continuing employment before and after the secondment would include continuing rights under the contract of employment, such as pension or seniority rights or, in some cases, share scheme participation, and the same employer. In borderline cases we may need to obtain legal advice before taking a view.
An accountant is employed by a French bank. To further his career he obtains a post as Human Resources Manager for a fixed contract of 18 months with the UK subsidiary of the bank. His contract with the French parent is terminated and he is given a contract with the UK subsidiary at rates of pay and allowances determined by the UK subsidiary. He hopes to be re-employed by the French parent at the end of his period in the UK but he has no continuing contractual rights.
On these facts we would take the view that the accountant has a new employment with a UK employer for a fixed term of 18 months. The French employment has terminated and he has taken up new employment in the UK. He retains merely a hope that his former French employer may re-employ him when his employment in the UK ends.
An employee of a Swedish company is seconded for 14 months to work at a UK subsidiary. She is paid by the UK subsidiary for the duration of her secondment at the same rate as she was paid in Sweden and retains some rights with the employer in Sweden. She retains membership of the pension scheme in Sweden and her time in the UK counts for her pension entitlement and for seniority purposes.
On these facts we would take the view that the employee has only one employment and that the UK secondment is at a temporary workplace in the course of a continuing employment. There is still one contract of employment, even though the obligations one ordinarily expects an employer to meet are partly met by a different company.
Duration of secondment
The basic rule is that a workplace can be treated as a temporary workplace where it is reasonable to assume that the employee’s attendance at that workplace in the course of a continuing employment will not exceed 24 months, see Section 339(5) and paragraph 3.13 of Booklet 490. We have been asked what factors ought to be taken into account in deciding whether it is reasonable to assume that a secondment will be for no more that 24 months.
We will look at each case in the round and consider not only any statements made by the employee and the employer, but also the expected duration of any project to which the employee is seconded and any agreements between the parties, whether or not they have been committed to writing. We may wish to look in detail at any case in which the secondment exceeds 24 months and we had been told that it would not.
In some cases there may be a change in circumstances that leads to a change in the expected length of the secondment. The workplace will be a temporary workplace during any time in which the reasonable expectation is that the secondment will be for a period that does not exceed 24 months. Therefore we cannot conclude in all cases that a continuation of the secondment beyond the 24 month limit must mean that the workplace cannot have been a temporary workplace at some stage.
A project manager for a French company is seconded to oversee a project in the UK. The project is expected to last 3 years. He has an initial secondment for 6 months but it is expected that his secondment will be extended for the duration of the project as long as his work is satisfactory. He has been assured that there is no reason to suppose that his secondment will not be extended.
On these facts we would take the view that it is reasonable to assume that he will be in the UK for the full three years of the project. His secondment would be expected to last for more than 24 months. So the UK site will not be a temporary workplace for the employee.
Circumstances may change in the future to affect this conclusion. For example, he may be seconded for a further 12 months after the initial 6 months and told at that time that he will not be given a further secondment. If so, the UK site will be a temporary workplace for that further 12 months. Or it may become clear that the project will be completed within 24 months. If so, the UK site will be a temporary workplace from the time at which that becomes clear.
The extra costs of business travel
Where it is established that an employee’s secondment is to a temporary workplace, the cost of business travel associated with that secondment includes not only travel between the employee’s home and the location of the secondment but also accommodation and subsistence costs for the duration of the secondment. To qualify for relief, subsistence and accommodation costs must be attributable to the business travel in the sense that they are costs that are additional to any costs that the employee would incur if it were not for the business travel.
Once it is accepted that the employee has incurred additional costs no account needs to be taken of the costs saved as a result of the business travel to determine the amount of relief that can be obtained. For example, if the employee eats in a restaurant while on a business trip relief can be obtained for the full amount of that meal and no restriction is made for the cost of the meal that the employee would otherwise have had at home.
We have been asked to comment on the example of Millie that appears at paragraph 5.5 of Booklet 490. The example illustrates the case of itinerant employees who have no permanent home and make their home wherever their work happens to take them. Such employees cannot deduct the cost of accommodation and subsistence while working at any particular place because they incur no additional expense. The position of an employee on secondment to a temporary workplace in the UK is typically quite different even if home country accommodation is not retained. The expense of accommodation in the UK is an additional expense.
An employee of a German company is seconded to a temporary workplace in the UK for 15 months. He sells his flat in Germany and rents a flat in the UK. When he returns to Germany he will need to find himself a new place to live.
We would accept that the rent of the UK flat for the duration of his secondment is an additional cost for which relief can be given.
In many cases an employer will provide an employee on secondment with furnished living accommodation or with a cash allowance out of which the employee can obtain living accommodation. We have been asked what limits will be placed on the relief that can be permitted for living accommodation.
We allow relief for an appropriate standard of hotel accommodation for the duration of the secondment. We also accept that the quality of the hotel accommodation provided can reflect the seniority of the employee.
In many cases furnished or unfurnished accommodation is obtained as a cheaper and more convenient alternative to hotel accommodation. Provided that the total cost of the accommodation is appropriate to the business need and is reasonable and not excessive we will not restrict the relief available. The total cost may include the reasonable cost of furniture where that is properly attributable to the business travel. If it can be demonstrated that the total cost of accommodation is reasonable by comparison with the cost of hotel accommodation of an appropriate standard full relief will be permitted. We anticipate that relief will only be restricted in a small number of cases.
Relief may need to be restricted in those cases where the standard of accommodation provided does not result from the need to provide the employee with necessary accommodation for the performance of the duties of the employment. For example, if accommodation is supplied in part because the employee is accompanied by his or her family, or the location of the accommodation is determined by reasons of non business convenience, and there is an increase in total costs as a result, a restriction may be due. It cannot be assumed that accommodation provided of a standard that reflects the standard of accommodation enjoyed by the employee in his or her own country will always be accepted as reasonable.
Where we accept that furnished or unfurnished accommodation is a reasonable alternative to hotel accommodation we will not normally restrict relief where the accommodation is available for weekends, short holidays during the secondment or other short non-working periods. However, we will restrict relief where significant non-business use is part of the purpose of providing the accommodation.
If relief needs to be restricted it will be restricted to the reasonable cost of accommodation that would have been provided to a single employee obtaining accommodation at a location convenient for the business need for the period of the secondment.
An employee of an Irish company is seconded to work in central London for 16 months. Her employer pays a round sum allowance of £560 per week to be used for accommodation and subsistence to the extent that she wishes. Although the allowance is intended for hotel accommodation she is permitted to rent a flat for a secondment of that duration. She rents a two bedroom flat in Tooting for £400 per week and spends the rest of her allowance on subsistence and travel between her flat and the location of her employment.
On these facts we would accept that the amount spent on accommodation is reasonable and not excessive. If it is accepted that the total paid does no more than cover the amount that a typical employee in her position would expect to spend on accommodation, travel and subsistence then the payment can be made free of PAYE and Class 1 NICs. It must be included on her P11D and she will be allowed relief for the amount she actually spends.
An employee of an Austrian company spends 18 months in the UK on secondment. Her employer rents for her a six bedroom house in Chelsea at a rent of £5,000 per week.
We accept that in some cases there will be a business need for the provision of accommodation on this scale, but it will have to be clearly established. Otherwise we would restrict relief to the cost of accommodation that can reasonably be regarded as attributable to the employee’s necessary attendance at the temporary workplace.
An employee of a German company is on secondment in the UK for 18 months. She is provided with a four bedroom house for herself, her husband and two children. A single employee in equivalent circumstances would only have been provided by her employer with a two bedroom flat.
On these facts part of what the employer provides is not a necessary expense attributable solely to the travel by the employee. Part of the accommodation is attributable to the accompanying family. Relief should be limited to the provision of a two bedroom flat.
A Swedish employee is seconded to Exeter for 15 months. He is a keen sailor and chooses to obtain accommodation in Salcombe, which is more expensive than Exeter.
On these facts the cost of accommodation in Salcombe is not solely attributable to the need for accommodation for the business trip. Relief should be limited to the cost of appropriate accommodation in Exeter and no relief can be permitted for the cost of travel between Salcombe and Exeter.
The key factor in example 8 is that the exercise of the employee’s choice about where to live during the secondment gives rise to additional costs. These costs are not attributable to the business travel, they are attributable to the employee’s private interests. However, such cases are likely to be rare. Many employees are permitted some discretion about where to live during an assignment. Provided the exercise of that discretion does not result in extra costs there is no reason why relief should be restricted. This is illustrated by example 9.
An employee of a Belgian company is seconded to work in London for 18 months. The employer is prepared to pay rent to all of its employees on secondment in London of up to £800 per month. She is required to live within 1 hours commuting distance of the office but is otherwise given a free choice about where to live. She wants to live near her sister who lives in Ladbroke Grove and she is able to find a one bedroom flat in a suitable location at £750 per month, a cost the employer meets.
On these facts we would accept that the full cost of the accommodation is attributable to the business travel. We would not argue that cheaper accommodation could have been found elsewhere within the 1 hour commuting limit.
As well as accommodation an employee on secondment can obtain relief for all of the additional subsistence costs attributable to the employee on that secondment. This covers food and drink and may also cover costs associated with accommodation, such as utility bills and personal expenditure attributable solely to the business travel. Relief may also be due for the cost of travel between the temporary accommodation and the temporary workplace. Payments for expenses incidental to the business travel may also be made tax-free up to the limit of £5 per night (or £10 outside the UK) imposed by Section 241 ITEPA 2003.
Although we publish agreed subsistence rates that may be paid tax-free for particular industries, we do not propose to agree or publish authorised subsistence rates for general application. Accurate rates across a range of different circumstances would be very complex and would need substantial resources to create and maintain. Simplified rates would run the risk of permitting excessive tax relief or of being inadequate and of little practical benefit. For these reasons we do not accept the use of generalised published rates such as those of the US Internal Revenue Service, or those published by the UN.
Employers may make scale rate payments for subsistence or may pay round sum allowances out of which subsistence costs can be met. The tax treatment of each method of payment is set out below.
Machinery for obtaining tax relief
Where round sum expense allowances are paid, these should normally be subject to PAYE and Class 1 NICs. A round sum allowance is an allowance paid to an employee, commonly in advance, that is not calculated to match the underlying expenditure. An example would be an amount of £100 per day paid to an employee on secondment to be used or not used as the employee sees fit. The example of Tracy at paragraph 9.6 in Booklet 490 illustrates this.
If a specific and distinct business expense is identified in the round sum allowance that expense does not need to be included in gross pay for NICs purposes.
If a round sum expense allowance is clearly meant to do no more than reimburse the employee for the actual costs of accommodation or subsistence incurred on the secondment, an Inspector may authorise the employer to pay it without deducting PAYE. Page 86 of booklet CWG2 and paragraph 9.6 of Booklet 490 explain the procedure and make it clear that the allowance should be included on form P9D or P11D as appropriate. The employee may then request a deduction under Section 338 ITEPA 2003 from the amounts included on form P9D or P11D. Relief will be given for the additional amounts an employee actually spends on accommodation or subsistence where those amounts are reasonable and necessary. We do not regard it as unreasonable to require an employee to keep records of expenditure to justify tax relief.
A dispensation under Section 65 ITEPA 2003 cannot be given in respect of a round sum expense allowance or a living accommodation benefit chargeable under Section 102 ITEPA 2003.
We will grant dispensations for scale rate payments, calculated on a scale intended to do no more than reimburse the employee for expenses the employee incurs that are deductible under Section 338 ITEPA 2003. The example of Thomas at paragraph 9.6 in Booklet 490 illustrates a scale rate payment. The conditions that must be satisfied before a dispensation can be granted are set out in the Employment Income Manual beginning at EIM30050.