Are hotel costs tax deductible?

New talent

If you want to attract the best person for the job you need to put together a competitive remuneration package. The trouble is that a package may feel super generous to one candidate, but not worthwhile to another. In a world where hybrid working and Teams meetings are the norm, it would be shortsighted to limit the talent pool to those who live in the immediate area. This can lead to the predicament our director is in but once you understand the tax cost of each option you can make a sensible counter offer.

Job expenses

Where job-related expenses are exempt from tax and NI contributions the expenses can be paid or reimbursed to an employee tax and NI free. The net cost to the company is the expense less corporation tax relief at 19-25%. Conversely, if an expense is not exempt you must treat the payment as either earnings or a benefit in kind. This becomes expensive for both of you as the tax treatment is the same as additional salary.

Hotel expenses

The potential employee isn’t being unreasonable. Most can sympathise that if you must work on site, a 300-mile commute is not sustainable. A logical conclusion is that in order to do the job, he needs to stay overnight at least some of the time.

However, overnight accommodation falls within the realm of “travel expenses”. Therefore, to work out whether the expense is exempt or not we must consider the tax treatment of the employee’s journey, i.e. if the employer pays or reimburses the costs of travelling between the employee’s home and the office and that would be exempt, so will the hotel expenses and vice versa.

Ordinary commuting

Travel costs are not exempt if they are for ordinary commuting between the employee’s home and a permanent workplace, usually that’s your business premises. This means if our director pays for or reimburses the employee for hotel expenses it will be subject to tax and NI.

HMRC accepts that if an employee is required to work from home then in some circumstances expenses can be exempt when they travel to another workplace, e.g. the office. However, this doesn’t help our director who requires the employee to work in the office.

Meet them halfway

The solution is to offer to pay for the employee to relocate to within a reasonable distance of the office. You can pay up to £8,000 of a new employee or director’s relocation expenses tax and NI free.

The conditions for the relocation exemption are that the move is required “wholly or mainly” to enable the employee to live within a reasonable travelling distance of their new place of employment.

There are no hard and fast rules which say when a travelling distance is “reasonable”; HMRC says that it’s a matter of common sense. This means the employee doesn’t need to move the full 150 miles to qualify, providing the commute becomes reasonable as a result.