Relocation, relocation
Many companies pay the expenses of staff who have to move home because of their job. Ian Whyteside explains the issues that crop up in the CYE exam
In previous articles, we have discussed the use of P11D working sheets as part of the year end process and how helpful they can be in calculating the correct tax values which eventually find their way on to the P11D itself.
We openly advocate the use of these working sheets and that is why they are included in the Completing Year-End Procedures exam. They help to ensure the final value is correct but, more importantly, it is impossible to attain maximum marks without them.
For this article. we are going to look at Working Sheet 5, entitled Relocation expenses payments and benefits. While examinations are likely to consider routine issues, there can be some very complex matters for staff to deal with.
It is critically important to understand the manner in which each item of likely expenditure on a relocation is to be dealt with for tax purposes. We must remember that moving house can bring a whole variety of costs. Some of them can be quite strange; not all of them are allowable.
Principles
As soon as the subject of relocating staff arises, whoever is responsible for the tax implications of such events needs to consider a number of issues:
Are they an employee?
If payments are made to, or in respect of, an agency worker, temporary worker or a contractor, then the usual PAYE rules would not apply. Of course, if HM Revenue & Customs (HMRC) discovered that relocation payments were made to a contractor, this would certainly jeopardise their non-employed status – but that is another issue.
Does the move qualify?
The definitions that determine what happens with removal and relocation costs are contained in the HMRC booklet 480, Expenses and benefits – A tax guide. For this examination, it is the 2006 version that applies. In chapter 5, the manual discusses non-taxable payments and benefits and covers removals expenses and benefits. The first part of this defines a ‘qualifying’ move:
The most important condition is that the employee must change his or her main residence as a result of
There does not have to be a sale of the original residence – the employee can let that out if they are in a position to do so. However, it is clear they have to move, or ‘change’, their ‘main residence’ in order for any costs met by the employer to qualify for exemption and consequently be non-taxable.
The booklet adds:
The new reidence must be within reasonable daily travelling distance of the new normal place of work.
The old residence must not be within daily travelling distance of the new normal place of work.
So, as long as the move satisfies these rules, there is a chance that the costs may be allowable.
Is the organisation paying anything towards the move?
If the employer does not pay any of the costs, there is no tax consideration at all. The rules are there only to provide some relief against necessary costs if the employer meets some or all of them in some way. This applies whether they are reimbursed to the employee, paid to the suppliers directly or met via an outsourced agency arrangement.
What items is the organisation paying for?
As shown above, the tax rules apply to all costs met by the employer, whether reimbursed to the employee who has paid for something out of their own pocket or paid directly to a supplier. The employer may have contracts with removals companies for office moves, so it may not be easy to identify the costs of a particular removal.
Knowledge of the actual transaction is needed in order to be able to produce evidence that the move does qualify and that the payments made are allowable. otherwise there is a danger that further on, during a compliance review, some removals may be disqualified and a P11D failure will exist. Booklet 480 states:
The exemptions clearly cover all the necessary costs of moving, including travelling and subsistence, so it is easy to realise that anything that was not absolutely necessary is going to be excluded. Any travel to the new job and to the intended new location for the purposes of searching for a new main residence, schools, surgeries, etc will be allowed, including costs for the family to accompany the new employee.
Another exemption is ‘domestic goods for the new residence’, but these have to be necessary for the new property. HMRC takes a pragmatic view of such matters and states that while original or copied receipts are preferable, a reasonable sum towards such purchases is generally allowable.
Extreme care is needed when dealing with costs that are met by the employer and that may eventually find their way back to the employee – rental deposits for example. As these are not deemed to be a true ‘cost’, they will not be included in the exemptions.
The process
Once the employer has separated the qualifying costs from the non-qualifying costs, the P11D can be completed once the relevant working sheet has been filled in. This is best illustrated with an example, in which our fictional employee is moving house and is selling their old property to move with the whole family to the new location.
Assume that the following costs have been incurred by the employer:
The first task is to consider the difference between qualifying and nonqualifying costs.
It is quite clear that the additional travelling costs will qualify, even if these are technically ‘home to permanent place of work’, because the additional costs are being met only because of the intended move. It is also obvious that the new conservatory is not an essential part of the removal and would not qualify.
The total of the qualifying costs is £11,277.07. This must be entered on P11D Working Sheet 5 before transferring the taxable total, if any, to the P11D itself. Remember that the exempt amount of £8,000 is per move and not an allowance for each tax year, so it is important to know the dates on which the costs are incurred and to make separate returns for each year.
Assuming that this was all incurred in a single tax year, the entries would be:
• Put the total amount in box A:
• Carry this down to box D:
• Calculate the exempt amount:
• Finally, enter the taxable amount in box F:
• The total in box F is transferred to the P11D at section J as follows:
• In most cases, the non-qualifying expenses will end up in section N of the P11D:
The whole process is reasonably straightforward. Candidates should ensure that they use the blank sheets to record all their calculations so that markers assessors can see how they have worked out the amounts on the two forms.
may not get it absolutely right but you can still pick up a lot of the marks.
Ian Whyteside is the Chief Assessor for Unit 73: Determining Net Pay and Unit 75: Completing Year-End Procedures of the AAT’s Payroll Qualification
Accounting Technician - May 2007 - 33
