As we are fast approaching P11D "season", we take a look this month at an area that is often not as straight forward for employers to deal with as it looks "on paper" which can result in reporting errors and additional liabilities. We're talking about employee relocations, or "removals" as HMRC sometimes calls it.

We cover off below some of the main, or common, points to watch when an employee receives some financial assistance from the employer in moving to a new location for work purposes.

The £8,000 tax exemption

Most employers are aware of the £8k exemption as it has been around for many years and many relocation policies are based around this threshold.

However, many employers do not realise that there are certain restrictions on when and how this exemption can apply (see some of the sections below) and automatically treat any relocation type payment as exempt and not reportable to HMRC where the costs are below the £8k limit. This is incorrect and certainly not an approach we would encourage. The facts of each relocation situation must be considered separately so that the employer can establish whether:

  1. The relocation meets the criteria for the exemption to apply, i.e. it is a qualifying relocation
  2. That each item of expenditure paid to, or on behalf of, the relocating employee falls within the definition of a qualifying expense

Situations where either the relocation is not a qualifying relocation, or where the expense is not a qualifying expense, will mean that there is a P11D reporting obligation and/or payroll issues regardless of whether the total costs are below £8k or not.

Is there a qualifying relocation?

One of the key sticking points is often around whether the employee has actually relocated or not. If, for example, the employee is returning "home" to the family every weekend, and living in a bachelor pad at the new location, this is unlikely to satisfy HMRC that the employee has actually moved permanently. Whilst there is no longer a requirement for the employee to dispose of their old home, there is certainly an expectation that the employee, and their family if there is one, must move "lock, stock and barrel" to the new location for the £8k exemption to be considered.

There can also be problems where the location of the new job/role is not too far away from the previous location or where the employee normally lives.

Qualifying v non qualifying expenses

The two main problems area with specific expenses are:

  1. Expenses being paid out of time, i.e. outside the deadline imposed for the exemption to apply (which is the end of the tax year following the year in which the new job/role started). We know some relocations do drag on but it is important that employers keep track of things to ensure the exemption is not lost because of bad timing.
  2. Costs not falling within any of the 6 qualifying categories which are all based around the "normal" costs of moving home e.g. legal costs, removal van/storage, domestic goods for the new place or additional travelling costs as well as some additional one-off costs such as bridging loans. Just because an expense is unusual does not necessarily mean that it does not qualify for the £8k exemption but it is not uncommon for HMRC to challenge the eligibility of such costs for the exemption.

It is worth mentioning here that one of the key areas we get asked time and time again to look at for clients who "may" have got things wrong is in relation to "temporary" accommodation whilst the employee looks for a new place to stay at the new location. Although this is actually a qualifying expense for the £8k exemption, HMRC has been known to challenge the temporary nature of such accommodation if the employee has settled there for too long or if the arrangements are woolly or inconsistent with what is normal in such circumstances.

Fixed sums and unreceipted costs

The vast majority of problem cases we come across on relocations is where the employer's policy is to pay a fixed relocation payment to the employee rather than paying for actual costs. This is usually done to keep things simple and to reduce admin time and hassle.

The default position for fixed sum payments like this is that PAYE and Class 1 NI must be deducted at source via payroll on any element of the payment that cannot be supported by proper receipts or evidence that the expense was incurred by the employee. Therefore paying an employee a fixed £5,000 or whatever and not requesting receipts to "net-off" against the £5k is not a sensible thing to do as the full £5k will be taxable and subject to NI even if there is a qualifying relocation.

It is essential therefore that employers and employees work together to ensure that tax and NI isn't being paid on fixed sums unnecessarily through a lack of proper records.

It is worth noting here that a lack of receipts is problematic in general, even where actual costs are being reimbursed, as HMRC will normally exclude costs from the exemption if there is no evidence to show the cost actually being incurred by the employee.

Interaction with other legislation/exemptions

It is often possible to obtain much more than £8k tax relief on employee relocations simply by using other just as useful exemptions or reliefs in combination with the £8k relocation exemption. Unfortunately, many employers do not realise this and we see many situations where significantly more tax and NI is paid over to HMRC than is necessary. This is particularly the case where an employee is moving from or to another country.

It is therefore important to consider each situation on its own merits and think about what other reliefs might be available in the circumstances, particularly around travel and subsistence. Obviously, this is only relevant if the total relocation package is in the vicinity of the £8k limit.

End of year tax reporting

It's not just the legislation that is the problem either. Doing the practical bit at year-end, i.e. completing forms P11D, can also bring some problems for the employer, specifically how and where to report relocation costs.

Hopefully, all readers are aware that all costs falling within the £8k exemption do not need to be reported on the P11D.

But what about the taxable payments ? Is the payment a qualifying expense and only taxable because total costs exceed £8k, in which case it is a Section J entry on P11D ? Or is it a non qualifying expense in which case does it go in Sections A, K, L, M or N on the P11D (all options according to HMRC), or even through payroll ? The answer to which is of course "it depends" - on what the expense is and who arranges and pays for it. And then NI needs to be considered - Class1A or Class 1 ?

This is all very well if you're that way inclined and know a lot about tax and P11Ds etc but there are many employers who aren't and don't !

Internal policies and PAYE Settlement Agreements

Away from HMRC, employers can have internal issues to resolve around relocations. Woolly policies equals potential conflict with (new) employees around what is and isn't acceptable or reimbursable. Also, too many employers are quick to agree that tax will be settled via the PSA for costs over £8k or for non qualifying expenses without actually realising that, in many cases, this is virtually doubling the cost to the business because of the grossing-up requirement of a PSA.

Conclusion

Many employee relocations are relatively simple affairs. Contribute some of the costs of an employee moving house to start a new job, no reporting to HMRC and no tax or NI to think about. Job done.

However, evidence shows that many employers struggle with the various tax rules around relocations and it is often the case that the particular circumstances do not fit into the nice and simple descriptions provided by legislation and HMRC as to how to treat payments.

Given that some relocation packages can be for significant amounts of money, especially where senior employees are involved, mistakes on the tax side can be very painful indeed for the employer and/or the employee.

This is yet another area of employment tax where the right advice at the right time can be invaluable to the bottom line.

The author of this article, Brian Rudkin, is now at PwC. Brian can be contacted on 0191 269 4483 or via email at This e-mail address is being protected from spambots. You need JavaScript enabled to view it
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