A business travel allowance is an important consideration to make if you have employees whose jobs require them to travel beyond their usual commute. Business travel takes many forms – from a day trip to another city for a conference to whole weeks or months abroad handling a foreign project. A business travel allowance covers expenses incurred on these business trips, ensuring that the employee doesn’t have to pay out of their own pocket for food, accommodation, travel, and other common costs.
With such a broad scope of spending, business travel expenses can quickly spiral out of control. Having a predefined travel allowance is a good idea, as it allows for easier forecasting of upcoming costs and less unregulated company spending. Travel expense management is already a complex process with various rules, regulations and paperwork to consider, so taking a structured approach to managing these costs can help to protect both your employees and you as their employer.
What’s in this guide:
- What is a business travel allowance?
- What can a business travel allowance be used for?
- Is a business travel allowance a legal requirement?
- What is a per diem allowance?
- How can employees learn more about the business travel allowance?
What is a business travel allowance?
A business travel allowance is either a sum paid by an employer prior to a trip to an employee or contractor to cover any expenses associated with corporate travel, or it may refer to the limit for which an employee can reclaim expenses for costs incurred during a business trip. Potential travel expenses include (but aren’t limited to) transport, overnight accommodation, and subsistence in the form of food and drinks.
The amount allocated to travel varies from business to business, depending on both the needs of the company and the sector it operates in. Setting a travel allowance is an efficient way of managing expenses, as it gives an idea of upcoming costs in advance and therefore allows for proper budgeting and planning. It can also ensure a greater return on investment for the trip as a whole. For example, if you travel across the country to pitch to a new client and win, ROI is achieved through making the sale and maximized through minimizing the cost of the trip.
What can a business travel allowance be used for?
Understandably, the specific guidelines about what’s covered by a business travel allowance differ between organizations, with some companies choosing to implement very strict rules. But, in general, any necessary cost associated with the work trip could be reimbursed by the employer. This might include:
- Hotels
- Taxis
- Airfares
- Meals
- Entertaining clients
- Tolls and parking
- International business calls
It’s important to remember that spending during business trips should be within reason – five-star restaurants and room service aren’t usually necessary, and therefore, aren’t likely to be covered in most organizations’ travel expense policies. Making things more complex, what’s classified as ‘within reason’ will also vary from business to business. For example, an international PR company would probably be more willing to spend large sums wining and dining clients than a local IT company would.
Is a business travel allowance a legal requirement?
Granting employees a business travel allowance is a legal obligation in some countries, but in others, such as the UK, it’s not. There are, however, tax implications to consider no matter where the company is based.
Although it varies between countries, things to look out for are expenses that may not be deductible for corporation tax purposes. In the UK for example, HMRC will not allow a deduction for the cost of entertaining clients. Another area to be watchful of are expenses that could be classed as taxable income on the employee – e.g., HMRC considers ordinary commuting costs to be taxable benefits if paid by the employer.
Care should also be taken as to exactly how the expenses are met, as the same expenses could have different tax treatments depending on whether it is paid directly by the employer or paid by the employee and reimbursed.
One simple method of reimbursement that’s often chosen in some countries is to give employees a flat day rate for travel costs, known as a ‘per diem’ rate, instead of reimbursing individual expenses. Again, care should be taken over the tax treatment of such an allowance as this will differ between countries.
What is a per diem allowance?
A per diem allowance is a daily financial entitlement that a corporation or organization gives an individual to cover expenses while traveling for business. It is used as an alternative to recording and reimbursing every individual receipt. A per diem allowance keeps things simple and allows the employee to choose where they want to spend and where they want to save.
This method takes the burden of keeping receipts and tracking employee spend, and saves the employer time they would otherwise have to spend trawling through paperwork and filing expense reports. It also gives employees the freedom to choose their own level of comfort, with some willing to spend their own money to ‘top up’ the rate and eat at a fancier restaurant or stay in a more luxurious hotel. Before deciding to implement a per diem allowance, you should ensure that this will not have any negative tax impact on either the employer or the employee, you can find the latest information for UK businesses here.
How can employees learn more about the business travel allowance?
All companies that have a need to spend on travel should have a corporate travel policy, outlining their own specific rules and guidelines. The policy should cover what can and can’t be covered as an expense, what the total travel allowance is, and how reimbursements are processed. Highlighting the differences between personal and business expenses is also advised, to make sure that both employer and employee are on the same page.
Clearly communicating what the company expects of the employee is vital to ensuring the smooth running of the entire process. Organizations should hold training sessions to further clarify the policy document, especially for new starters or following a policy update.
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