Where an employer makes payments, which are no more than a re-imbursement of allowable expenses actually incurred by an employee, they may be paid free of tax in certain circumstances in accordance with legislation.
The law provides that employees’ expenses qualify for deduction only where they are incurred “wholly, exclusively and necessarily” in performing the duties of the employment.
Those expenses, which are incurred by employees in travelling to and from the place of employment, are not allowable for tax purposes and any re-imbursement of these expenses must be treated as pay.
Where an employee’s allowable expenses are re-imbursed free of tax by an employer, the question of an income tax claim by the employee in respect of those expenses does not arise.
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Where employees use their private cars for business purposes, re-imbursement in respect of allowable motoring expenses can be made by way of flat-rate kilometric allowances.
Kilometric allowances are calculated using a formula which simulates the likely allowable motoring expenses through the application of a standard costing type system.
The system requires that the car is owned by the employee and all motoring expenses are met by the employee.
If any specific motoring expenses (including finance costs and exceptional expenditures) are re-imbursed by the employer, the appropriate tax treatment needs to be examined with your tax advisor.
Where the employee bears the cost of all the motoring expenses, there are two types of kilometric allowance schemes which are acceptable for tax purposes:-
- The prevailing schedule of Civil Service rates or
- Any other schedule with rates not greater than the Civil Service rates.
Either of those two re-imbursement rates may be applied without specific Revenue approval where a satisfactory recording and internal control system is in operation.
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The Civil Service Motor Kilometric Rates use a simplified kilometric rate structure involving two bands and streamlined categories of car engine capacities.
All Civil Service employees have a kilometric year based on the calendar year.
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Flat-rate kilometric allowances apply only to allowable motoring expenses. The expenses must be incurred by an employee who is engaged on a business journey. All the costs of motoring must be borne by the employee.
A business journey is one in which the employee travels from one place of work to another place of work in the performance of the duties of the employment.
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Where an employee proceeds on a business journey directly from home to a temporary place of work (rather than commencing that business journey from his/her normal place of work) or returns home directly, the business Kilometres should be calculated by reference to the lesser of -
- The distance between home and the temporary place of work or
- The distance between the normal place of work and the temporary place of work.
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The advantage of the kilometric rate system is that employees do not have to keep a precise record of actual motoring costs. They would, however, be expected to provide to their employer a record showing, for each business journey:
- The date of the journey
- The reason for the journey
- The distance (km) involved.
A straightforward record of this kind would, in any event, be required for an employer’s financial and internal control purposes and it should therefore not involve additional paperwork.
If an employer has doubts about the adequacy of the tax accounting records for employees (including directors), the Regional Revenue office can be consulted. All records relating to any re-imbursement of motoring expenses should be retained by the employer for examination in the event of an audit. The records must be kept for six years unless the Inspector of Taxes states otherwise.
Re-imbursement of allowable motoring expenses without deduction of tax in accordance with acceptable flat-rate kilometric allowances avoids the need for claims by the employee for expenses deductions (and any wear and tear allowance in respect of the motor vehicle).
Notwithstanding this, an employee retains the alternative right to the statutory entitlements to claim an expenses deduction (and any wear and tear allowance in respect of the motor vehicle). However, where the employee decides to make such claims, any re-imbursement of expenses by the employer, including any scale allowances, would be regarded as pay and taxable accordingly.
The running expenses actually incurred and any wear and tear allowance, will not be fully allowed for tax purposes where a car purchased at a cost in excess of predetermined limits.
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