The travel and subsistence allowance that companies give to their employees often gives rise to many tax complications for both the company and the employees, if not properly managed.
The most complex tax issue with respect to these allowances is deciding whether they are taxable on the employees or not.
As a general rule, travel allowances offered to cater for business journeys should not be taxed on employees.
A business journey is one which either involves travel from one place of work to another; or from home to a client’s or customer’s premises.
Journeys between an employee’s home and a place of work, which he or she regularly attends, are not business journeys. These journeys are ‘ordinary commuting’ and the costs of these have to be borne by the employee.
If the employer pays an employee a travel allowance to enable them to travel from their home to the place of work or office, then according to the tax law, this allowance is taxable on the employee.
Likewise, if an employer provides his employees with transport from their place of work to home, say in form of a staff bus, then the value of the transport provided to the employee is taxable on the employee as a benefit-in-kind.
An employee would not be taxable on a travel or subsistence allowance from their employer as long as the allowance is supposed to cater for or reimburse the employee’s business travel costs.
In addition to this, subsistence payments commonly referred to as per diems, given to the employee by the employer, to enable the employee cater for his/her costs while away from his/her permanent workplace, and on company business, should not be taxable on the employee.
Such allowances are aimed at covering the employee’s costs such as accommodation, food and drink costs while away from his/her permanent workplace.
However, for this tax exemption to apply, the subsistence allowance or per diem must represent solely the reimbursement to the employee of the amount expended by the employee on the company’s business.
One of the most common and practical ways of proving this to the satisfaction of the taxman is to ensure that the employee provides full accountability for the subsistence allowance and per diem given to them by the company.
Alternatively, the employer could have a written policy explaining what the per diem is meant to cover, the rates for local and international destinations, and how the rates are determined.
To clarify, the per diem should be reasonable and should represent an estimate for what would have been paid by the employer.
Failure to do this may result in the amount being taxed on the employee as employment income or not allowed as a deductable expense in calculating the taxable income of the business.
For some employees, travelling is an integral part of their job. For example, a travelling salesman or news reporter, who does not have a permanent base at which he works.
Travelling and subsistence allowances given to such employees should not be taxable.
Likewise, refund of expenses incurred by such employees, which is often provided in the form of a car or mileage allowances should not be taxable on the employee.
However, it is always important to ensure that the employer keeps proper records to support the fact that the allowance is a reimbursement of costs incurred by the employee on the company’s business.
Therefore, travel and subsistence allowances are exempt from tax as long as they meet the conditions discussed above.
However, as always is the case with taxation, there are always borderline cases. For example, is transport provided to company staff going back home at the end of a night shift at midnight, a taxable benefit? It depends.
Paul Frobisher Mugambwa is a Tax Manager PwC Rwanda