Jo is a junior solicitor employed by a London firm with offices in Regent Street. She lives in Windsor, but has to spend a week working with a client in St Albans.
Instead of going to her normal place of work in London, Jo travels directly between home and a temporary place of work, St Albans, while visiting her client there. This is referred to as triangular travel.
Under current law, she can get tax relief on whichever is the lesser: the travel costs actually incurred, or the costs that would have been incurred if the journey had started and finished at the normal place of work.
Accordingly, Jo may claim relief for the cost of travelling between Windsor and St Albans or between Regent Street and St Albans, whichever is lower. Currently, she is not restricted to claiming the excess over her normal home to work cost.
Following extensive consultation with representative bodies, the Chancellor proposed in his autumn 1996 Budget that the tax rules for triangular travel be changed with effect from 6 April 1998. Overall, it is likely the changes on triangular travel will favour the Exchequer.
Under Clause 63 of the Finance Bill 1997, an employee who is required to travel directly from his or her home to a temporary workplace (for example, his or her employer's client) will be able to claim travelling expenses in excess of his or her normal home to office cost.
The application of the proposed rules can be illustrated by reference to junior Jo. Let us suppose the distances involved are as shown in the diagram below: 24 miles between St Albans and Windsor, 20 miles between St Albans and Regent Street, and 22 miles between Windsor and Regent Street.
Under the existing rules, Jo can claim whichever is cheapest: the cost of a return trip from Windsor to St Albans, or a return trip from Regent Street to St Albans.
Assuming all her travel is by car, she will be able to claim for 40 miles out of her 48 mile journey. So her private mileage will be only 8 miles, instead of her normal home to office mileage of 44 miles.
If, on the other hand, she held a season ticket for travelling between Windsor and Regent Street, her extra cost of going to St Albans would be the full 48 miles, of which she could still only claim for 40. This shows that under the present arrangements there are both winners and losers.
Under the new rules, Jo's allowable cost would vary depending on whether or not she had a season ticket between Windsor and Regent Street.
If she had, she would be able to claim the whole cost of driving the 48 miles from Windsor to St Albans and back. But if she did not have a season ticket, because, for example, she normally drove from home to her office in Regent Street, she would only be able to claim the cost of the excess four miles.
So what effect will these new rules have in practice? The new approach to triangular travel only has effect from 6 April 1998 – the Inland Revenue has emphasised the rules will not have retrospective effect. When other areas of taxation have changed, the Inland Revenue has sometimes taken a close look at whether employers are operating the pre-change rules properly.
Accordingly, if a business has been reimbursing the whole of travel costs between home and a client's premises, the Inland Revenue will argue this is excessive if the cost of travelling from the office would have been lower. There may then be back tax and interest, and possibly penalties.
There will, invariably, be losers under the new rules for triangular travel. Businesses will have to inform some employees that their travel allowance has reduced, and will then have to decide whether to make up the difference in their salary. This will provide an additional cost to businesses.
Under the new rules, employers will need to know the normal cost of commuting for each employee and incur the necessary administrative burden. If an employer gets it wrong, an employee who uses a car, for example, may have received some free private petrol. This could mean the employee is taxable on the full scale charge for private petrol, which could mean tax payable of nearly £600 for some employees.
The taxation rules for business travelling are surprisingly complicated. Companies must understand them, especially as employees will be relying on the accurate provision of benefits information under the new self-assessment system.