Travel and Which Expenses are Deductible for Business Travel
/Written by – Matthew Armstrong
With life starting to return to normal due to the successful implementation of the covid-19 vaccine, this is the perfect opportunity to talk about travel and accommodation and what it means for you and your business.
We want to take this time to discuss how you can go about claiming expenses associated with travel, what the deductions are, what are the allowance guidelines set out by SARS, the impact they have on your VAT, what the implications are for your PAYE and company tax and lastly, how to determine if travel expenses can be allocated as a business expense or not. This will be discussed around flights, local travel (by car or train) and accommodation on business trips.
Travel and Accommodation Expenses
What is a travel or accommodation expense?
Travel can be classified as a business expense if that expense is incurred due to the need to travel from point A to point B in order to conduct your business operations. Travel expenses include items such as fuel and flights. Accommodation is defined as the cost incurred due to being unable to stay at your normal place of residence whilst conducting business. Staying in a hotel during a business trip overseas or to another part of the country is recognized by SARS as a business expense and can therefore be put on the income statement.
Who can claim travel expenses?
If your business is a private company then SARS makes no distinction regarding employment status between any of the people who work in differing roles. All people who work at private companies are deemed to be employees in the tax guidelines and as such they are treated the same way with regards to a travel allowance, travel reimbursement or subsistence allowance.
Travel Allowance
A travel allowance is paying an employee a fixed amount each month for travel expenses that they will incur during the normal course of their work. With this arrangement the travel allowance forms part of the employee’s remuneration package. This travel allowance is taxed at a slightly lower rate by SARS resulting in a reduction of the PAYE that needs to be paid over each month.
For example:
A company has a sales agent who frequently needs to travel throughout the year on business. If the employee earns a fixed amount of R 500 000 per year and they request a travel allowance, then their basic salary could be reduced to R380 000 and thereafter R120 000 can be allocated to their travel allowance. They would be taxed at the normal rate for the R380 000 that they are receiving but only 80% of the R120 000 is subject to PAYE.
Because the travel allowance is in the employee’s contract it helps to limit their remuneration owing to the fact that it is taken from their salary, this helps to save on employee related expenses when compared to the option of the travel reimbursement allowance. This can also be paired with a petrol card, which would reduce the cash flow certainty benefits.
In this scenario, if the employee receives an allowance of R60 000 and the amount that spend on petrol is R50 000 then the full R110 000 can be claimed from SARS reducing the PAYE that needs to be paid. It is the responsibility of the employees to keep a logbook detailing company travel. This is due to the fact that in the travel allowance the company does not have to keep any record of what the travel related expenses of the employee are.
Risks and Drawbacks
However, the travel allowance does have several drawbacks that are worth considering when deciding if this is the right option for your business. If you decide to give an employee a travel allowance of R40 000 per year and they are eligible to claim business kilometers of R70 000, SARS will not allow the claim for the additional R30 000 kilometers to be submitted.
This risk can somewhat be mitigated somewhat by providing an employee with a travel allowance and a petrol card. In this case the employee would be entitled to claim the full amount of petrol and the travel allowance as a tax reduction. But, in order for them to successfully claim the tax reduction from SARS they must keep, and submit, a logbook.
The major risk with implementing a travel allowance is that you may end up underpaying PAYE to SARS which can result in penalties and interest, as well as having to pay more towards PAYE in order to settle any dispute with SARS. For any claim made using a travel allowance, a valid, up-to-date logbook must be submitted for the claim to be successful. It must include an accurate record of the number of business-related kilometers travelled, and this responsibility lies with the employee.
If PAYE is underpaid however because of incomplete or erroneous information, it will be the employer that is liable rather than the person who is receiving the travel allowance. As it is the business that makes PAYE payments to SARS, should there be any shortfall in the amount paid it is the business that will be held responsible. It is therefore in the company’s interests to ensure that any such scheme is properly managed and administered. You may decide that a travel reimbursement allowance would better suit your needs.
Travel Reimbursement Allowance
A travel reimbursement allowance is the alternative to a standard travel allowance. It involves refunding the employee for each kilometer that they drive. The maximum refundable rate is decided by SARS and is currently set at R3.82 per kilometer, but you can pay any rate below this. Should you decide to pay more than this, the extra will be subject to PAYE.
The main benefit of the travel reimbursement allowance is that you will be able to ensure that correct kilometers are being recorded. It also creates incentives that align for both you and SARS. You want to ensure that the figures are correct so that you reimburse your employees correctly, and SARS wants them to be correct so that they are paid the correct amount of tax.
Another benefit of this system is that there is negligible risk of underpaying PAYE to SARS as it has checks and balances built into the administrative process. The drawback is that there will be some administrative expenses. This is caused by the need for your employee to submit a reimbursement form that will need to be checked and verified, and in addition, they will also need to submit a logbook to SARS. In addition forecasting cash flow will be more difficult as the exact amount that needs to be reimbursed each month is uncertain. Thus, for any forecast on this expense some assumptions will have to be made.
Accommodation and Business trips
When you go on business trips you are allowed to pay a subsistence allowance or subsistence advance for your employee; both are fixed amounts given to the employee for the trip. The only difference between the two is that for a subsistence advance, the employee would be required to provide proof of expenditure and pay back any unspent money.
However, with a subsistence allowance they would not be forced to provide proof of expenditure. For our purposes we will assume that they must provide proof of expenditure, simply because of the added accounting control involved.
SARS will allow R139 per day for incidental expenses like private phone calls, beverages, tips, and room service and R452 per day for meals and incidental expenses. Importantly, SARS does not stipulate an allowance for accommodation. Therefore, should your advance, including accommodation, be R900 per day and you can prove to SARS that the additional R448 per day was for accommodation, then the entire R900 will be tax free despite it being above the R452 threshold.
This allowance is only accounted for by the individual at the end of the financial year and therefore is not a liability for your business should the individual not be able to prove that R448 was for accommodation.
Any amount that is within the limit set out for SARS will not require supporting documentation. For an individual going on a business trip who receives an advance for accommodation and consequently is over the limit of R452 set by SARS, they will need to provide proof of this expense to be able to claim the entire advance as a tax reduction in their IRP5.
Furthermore, anything that was not repaid to your company will also be taxed as an additional income. In addition, if you receive more than the allowance and you can prove that it is indeed for travel, you will be able to claim against this expense when submitting your personal tax return. Consequently, for such a claim to be valid, proof of expenditure, something we recommend you keep regardless, will be required.
It is also worth mentioning that SARS has different rates depending on where you travel to. For example, should you travel to the USA then the allowance is $146 per day. Consequently before any decision is made with regards to the allowance it is worth checking the SARS subsistence for foreign travel annexure.
When it is decided that the business trip is taking place then it is advisable that you grant the people going on the trip an allowance for the accommodation and flights. If your company pays for the flights and accommodation directly, they will be able to claim back the VAT on these expenses (where applicable). On the other hand, if an allowance is given instead then the entire expense will be recorded on the income statement and therefore the company tax that is paid over to SARS is reduced. Since the company tax rate is higher than VAT, the result would be a net saving for your company.
How do I claim these allowances?
Travel allowance and Travel Reimbursement
These allowances are claimed in the personal tax return of the individual, with a logbook being required for any valid claim.
Subsistence Allowance
You claim against your personal tax return by using proof of expenditure as the supporting documentation for SARS.
Flights
VAT is charged on all domestic flights but, if they can be shown to be for business rather than pleasure then this VAT can be claimed back from SARS. There is no VAT on international flights; instead an Air Passenger Tax is imposed of R190 per passenger travelling abroad unless they are flying to the following countries: Botswana, Lesotho, eSwatini where the tax is R100.
What about VAT?
VAT can either be charged at the Standard Rate which is 15% and if applicable the input VAT can be claimed back from SARS. It can also be charged at a rate of 0% where the vendor selling these goods can claim the input VAT from SARS. Lastly the goods can be exempt from SARS where no VAT is charged on the goods being sold and the vendor selling these goods cannot claim the input VAT back from SARS. With respect to travel below is a list of the items that you are most likely to encounter for VAT.
Standard Rate
Tour Guides.
Hotel accommodation – this is charged at the standard rate of 15% unless the stay is longer than 29 days then the VAT charged will be 9%.
Local transportation of goods and passengers.
All additional charges like but not limited to, baggage fees, room service and transaction fees.
Zero Rated
International Travel insurance.
International Travel.
The South African leg of an international journey transporting goods or passengers.
VAT Exempt
Airport Shuttle service.
Transport using road or rail between two places in South Africa.
Fare paying passengers and their luggage or belongings that is supplied by a transport business.
Trains, luxury busses and taxis.
If you need help with travel allowance get in touch!
