Various methods exist for compensating employees for expenses related to business travel:
- Reimbursement for actual expenses incurred and documented through an expense report.
- Provision of corporate credit cards to employees.
- Payment of daily allowances, also known as a scale-rated fixed-amount expenditure.
The daily allowance, or scale rate, furnishes employees with a predetermined fixed amount per day to cover their travel expenditures, eliminating the necessity of managing large quantities of receipts typically required for expense reimbursements.
This approach streamlines accounting procedures and paperwork for both the business and its employees in handling travel expenses.
Moreover, it enables the business to anticipate employee travel costs more accurately.
When integrated into a comprehensive travel policy, scale rate reimbursement simplifies the process of ensuring that travel expenses are tax-deductible for the business and that employees do not incur taxes on the reimbursed amount.
What does the daily allowance encompass?
The daily allowance or scale rate reimbursement encompasses expenses associated with meals, accommodations, and any other ancillary travel costs, such as parking fees, for each day of business travel.
Each expense category has a predetermined rate established by the UK government, detailed further below, based on average costs associated with specific locations.
Typically, businesses apply a partial daily allowance rate for the first and last days of a trip, as employees might spend part of those days either at the office or at home.
Businesses need to furnish employees with travel guidelines containing a clear per diem policy delineating what is covered and the scale rates applicable to all relevant locations.
To receive reimbursement, employees must submit daily reports and can spend up to the limit of their daily allowance.
Employees usually retain the difference if they spend less than their limit, incentivising cost-conscious behaviour and minimising expenses for the company.
Advantages of daily allowances
Daily allowance scale rates offer several advantages for both employees and employers:
Streamlined expense management:
Instead of tracking individual receipts for every meal and incidental expense, the daily allowance provides a fixed daily sum to cover expenses, reducing time and administrative burdens associated with expense reporting.
Cost control and budgeting:
Predetermined daily limits for travel expenses assist businesses in controlling costs by establishing a clear framework for reimbursable expenses.
Tax benefits:
Per diem payments are typically non-taxable for employees if they adhere to government guidelines for accountable plans, reducing their taxable income. For employers, per diem payments are generally tax-deductible as a business expense, potentially offering tax savings.
Consistency and standardisation:
Per diem rates offer a consistent and standardised approach to reimbursing travel expenses, ensuring fairness among employees and avoiding discrepancies in reimbursement amounts.
Flexibility for employees:
Employees have the flexibility to allocate the daily allowance among meals, lodging, and incidentals according to their preferences, provided the total amount remains within the per diem rate.
Time and productivity:
Per diem saves time for employees by allowing them to focus on work and productivity during business trips, while employers can allocate resources to more strategic activities rather than expense management.
Incentivising cost-conscious behaviour:
A fixed daily allowance motivates employees to make cost-conscious decisions, such as selecting reasonably priced meals and accommodations.
How are per diem rates disbursed by businesses?
Businesses can disburse per diem payments to employees either electronically or by cheque, issued separately from wages.
Per diem reimbursements are not subject to taxes but must be declared regularly, usually weekly or monthly, for the business to claim them promptly.
How are per diem payments taxed?
Employee travel expenses, including per diem reimbursements, qualify as allowable business deductions provided they are supported by an “accountable plan” as per government guidelines.
These guidelines necessitate that expenses be business-related, adequately accounted for through daily reports submitted by employees, and any amounts exceeding the set rates are returned by the employee within a reasonable timeframe.
Per diem payments are non-taxable for employees provided that the required daily reports contain essential information such as the business purpose of the expense, date, time, place, and amount of the expense, along with lodging receipts. Meal or incidental receipts are not required to be submitted with the report.
Per diems for the self-employed
Self-employed individuals can utilise per diems to manage their travel expenses, particularly if they frequently attend conferences, meet clients, or conduct site visits.
Instead of receiving payment from an employer, self-employed individuals can claim per diem as a deductible business expense, thereby reducing their overall tax liability.
Per diem rates should align with government guidelines, and individuals should maintain records of travel dates, destinations, and the purpose of each trip, along with documenting expenses for meals, lodging, and incidentals.
While per diem obviates the need for detailed receipts, it is advisable to retain receipts for significant expenses or situations requiring additional documentation.
Types of per diem or scale rate payments
In other countries such as the US, different types of per diem or scale rate payments exist to account for variations in travel types and locations.
In the UK, the employee rate differs depending on the type of travel and location, generally following government-set rates.
Final thoughts
Building streamlined processes and fostering job flexibility are crucial components of maintaining a content and engaged workforce.
Consider whether implementing one or both types of per diem could enhance your business operations.
Per diem FAQs
Are per diem payments taxable?
Per diem payments may be taxable or non-taxable depending on the purpose of travel and prevailing tax regulations. For business-related travel, per diem payments are often non-taxable if they adhere to government guidelines for accountable plans.
What expenses does per diem cover?
Per diem typically covers expenses related to meals, lodging, and incidental costs incurred during travel, providing a standardised daily allowance without necessitating detailed receipts for each individual expense.
Who is eligible for per diem?
Eligibility varies based on the organisation or governing body. Generally, employees required to travel for business purposes or individuals working on specific projects away from their regular workplace may be eligible.
Can per diem rates change over time?
Yes, per diem rates can change due to factors such as inflation, variations in travel costs, or updates to government regulations. It is essential to stay updated on the latest per diem rates applicable to your travel destinations.
How do I claim per diem expenses?
To claim per diem expenses, individuals typically need to maintain accurate records of travel, including dates, destinations, and the purpose of the trip. Some organisations may require employees to submit expense reports or utilise specific forms for reimbursement.
Are there per diem rates for international travel?
Yes, per diem rates for international travel may vary based on the country and city visited, considering factors such as exchange rates and local costs. Updated rates can be found on government websites.
Can per diem be combined with other travel expenses?
Yes, per diem can often be combined with other expenses such as transportation costs (e.g. airfare, taxi fares) and business-related expenses (e.g. conference registration fees).
Source – https://www.sage.com/en-gb/blog/what-is-per-diem-meaning/
