What costs can you reimburse to lorry drivers in the most tax efficient way?

If you run a company and you employ professional lorry drivers, then your business might have particular tax concerns. The tax system in the UK is complex and can be daunting to navigate but it’s important that you get it right, as there are serious penalties for getting things wrong. Also, the first thing a business owner should remember is that costs incurred exclusively for the business purpose can be reimbursed. On other hand any benefits offered to employees are taxed in the same way as their income. If you’re not sure how to pay your drivers from a tax perspective, we’re here to help!

What costs can you reimburse to your drivers in the most tax efficient way?

You have two options:

- you can either reimburse your drivers for their actual travel costs, incurred when staying away from home (and we have to remember, all these costs should be directly and exclusively related to the business); or

- a set rate, for example benchmark scale rates for meal allowances or a lorry driver’s overnight subsistence allowance.

Either you choose to reimburse the actual costs or to pay a set rate, your employee must have actually incurred a qualifying expense during their journey.

When paying the scale rate payments you can either check a sample of claims or choose to check all claims, depending on the type of checking system you have in place. However, what you choose is entirely up to you, as from 6 April 2019 these checks are no longer a requirement. In order to make payments free of tax in relation to expenses paid or reimbursed using benchmark scale rates, Employers only required to ensure that employees are undertaking qualifying travel on occasions in respect of which a payment is made.

If you are reimbursing your employees for the costs associated with the use of their cars in private purposes, then this reimbursement is taxable. If you are not paying for these private use costs, then this is not a taxable benefit either.

Although if you are paying using bespoke rates, a checking system will still be necessary.

Employers have the following 6 options for the reimbursement of expenses to choose from:

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1. Benchmark scale rate payments

This works for employers, who didn’t put in place an agreement with HMRC, and reimburse to employees money spent on a business journey in the UK, and any other allowable expenses incurred while on that journey. Employer can pay up to the maximum published benchmark scale rates for day subsistence, in respect of travel. Currently it varies from up to £5 for more than 5 hours journey, to £25 for journeys over 15 hours (and ongoing at 8pm).

Employers are required to ensure that employees are undertaking qualifying travel on occasions in respect of which a payment is made. This relates to domestic travel only. For overseas travel, see option 5 below.

A supplementary rate of £10 can be paid to cover the additional expenses necessarily incurred, if the qualifying journey lasts beyond 8pm and a benchmark scale rate of £5 or £10 is paid.

2. Agreed industry scale rate – lorry drivers’ overnight subsistence allowance

We can apply to HMRC on Employer’s behalf for an approval notice to use the agreed haulage industry scale rate for overnight stays away from home. The maximum agreed amount that can be paid free of Income Tax and NICs as at May 2022, is £34.90, or 75% of this figure (£26.20) where the driver uses a sleeper cab, and incurs subsistence expenses after starting their journey, but only where an overnight stay has been required (and not just because it was necessary to get to work). For example, if you have a driver who travels alone one way and then returns home the next day (to avoid paying two sets of accommodation costs), then the claimable expense would be limited to one night’s stay only.

A checking system has to be also used by Employer to ensure periodic checks are carried out on a sample of employees to ensure employees are incurring expenses for meals and other subsistence costs while travelling, and that the payment remains a reasonable estimate of the costs usually incurred. For this purpose HMRC considers a meal as a combination of food and drink.

3. Bespoke agreements

We can also apply for an individual bespoke scale rate, if your company wishes to pay more than the agreed industry scale rate. A sampling exercise for daily subsistence, overnight subsistence costs or both will also be required to establish a reasonable estimate of the expenses actually incurred by your employees after starting their journey. The expense claims have to be also periodically randomly checked by Employer to ensure that the payments remain a reasonable estimate of the costs actually incurred and are not excessive.

4. Other allowances

In addition to the arrangements detailed above, employer can also pay or reimburse employees incidental overnight expenditure in case on journeys employees stay away from home and incur additional incidental costs (up to £5 per night for overnight stays in the UK and up to £10 for overnight stays abroad).

For multiple nights away from home in a single continuous trip, the maximum claim per night for overnight stays is averaged for the whole trip, and not calculated for each night. For example, if your employee is away from home for 4 nights in the UK, the limit is £20 for the 4 nights. You can reimburse more than £5 for any given night as long as the total reimbursement for the 4 nights does not exceed £20. And please note, if you exceed these limits, the whole payment becomes taxable and not just the excess.

5. Overseas scale rates

For the overseas trips, HMRC publishes overseas scale rate payments for employees who stay away from home overnight outside the UK. Employer must ensure that employees are undertaking qualifying travel.

6. Direct expenses claims

Where employees provide evidence for the actual expense incurred, employer may choose to pay or reimburse actual expenditure. If you decide to reimburse your employees for these costs as well as other related expenses, such as tolls and parking fees, it will be important to keep track of what employees have been reimbursed and how much they have paid out-of-pocket.

The UK tax system sometimes can be difficult to understand, but we hope that we clarified some of the most pressing questions about tax treatment of lorry drivers.

However, there are certainly more questions that we haven’t covered here, so if you have further queries on this subject, don’t hesitate to get in touch with us at your convenience.

Here at Cannon Accountants, we’ve got your needs covered. We’ll provide you with the tools to track your costs and sales to make sure that your business does everything properly taking into account the specifics of industry you are in. The software we use and offer to our clients is designed to help keep things simple for small businesses like yours so you can focus more on what matters most: growing your business! Please get in touch with us at info@cannonaccountants.co.uk