Getting to grips with relocation expenses

What is a relocation allowance?

Moving house is widely recognised as being a stressful experience. The physical upheaval as well as the mental strain of changing residence can take its toll. On top of that, it can be costly as well. Buying or renting a new property, selling or renting out the old property, stamp duty, transporting furniture, buying new furniture, taking out bridging loans, estate agents’ fees, staying in temporary accommodation until permanent accommodation is available … these costs and many more can soon add up. 

Employers are not required to cover employees’ relocation expenses, unless the terms of the employment contract include specific provisions to this effect. However, best practice dictates that most employers do offer financial assistance with relocation and there can be benefits for all of doing so. This assistance usually comes in the form of a “relocation allowance” to cover the cost of certain things. This may come in the form of a lump sum payment, a reimbursement of actual costs, or a direct supplier payment.

Employers and self-employed workers taking on new staff need to be aware that there are tax and reporting obligations of offering these relocation packages. Under certain conditions, up to £8,000 of a relocation allowance granted by an employer can be considered free of tax and NICs. 

Under what circumstances are relocation expenses tax exempt?

In order for relocation expenses to be potentially tax and NIC exempt, HMRC states that the reasons for the relocation must fall into one of four categories:

• A new employee is moving area to start a new job
• An existing employee within the business is changing their usual place of work
• An existing employee’s new home is within a “reasonable distance” of the workplace
• The employee has started work and costs are paid before the end of the following tax year

If the situation does fall into one of these categories, then the relocation costs which are potentially tax exempt are referred to as “qualifying costs”.

The definition of the term “reasonable distance” is not precisely defined in the legislation and is considered on a case-by-case basis using a common-sense approach. It is generally takes into account distance, travel time, availability of public transport, personal circumstances and inconvenience. A 25-mile journey to work for someone with a car does not pose the same difficulties as for someone who doesn’t drive and when there is no public transport.

What are qualifying costs?

In any of the four situations listed above, certain relocation costs, referred to as “qualifying costs” of up to £8,000 can be tax and NIC exempt.

According to HMRC, qualifying costs include:

• The costs of selling and/or buying a property
• Removal costs
• Transport costs
• Stamp duty
• The cost of estate agent’s services
• Costs of buying certain items for the new home
• Bridging loans to cover the purchase of the new home
• Travel and subsistence costs while the employee finds a new home
• Temporary accommodation while the employee finds a new home
• Legal fees connected with the sale of the old property

What costs are not covered?

As well as specifying the types of costs that can be considered to be tax and NIC exempt, you should also bear in mind the types of costs that are not considered to be “qualifying costs”. These include:

• Mortgage interest payments on the existing home
• Compensation for other losses (such as financial loss on the sale of the home)
• Redirection of mail
• Council Tax bills

Other costs, such as clothing allowances, may be covered by other provisions, but are not specifically covered by the relocation allowance.

What if costs go over £8,000?

The tax-free allowance only goes up to £8,000. Given the range of qualifying costs, including removal costs and stamp duty, this is a ceiling that can quickly be reached. If costs exceed £8,000, the employer will have to pay tax and NICs on the excess amount. This should be reported on form P11D and would therefore be subject to Class 1A NICs.

What if an employee refuses to relocate?

Most employment contracts will contain provisions on the whether or not an employee is expected to relocate. Again, the “reasonable” nature of the request to relocate should be taken into account – including the personal circumstances of the individual (do they have family or carer responsibilities outside work, do they drive etc.).

The amount of time an employee is given to relocate should also be reasonable. If an employee with a mobility clause in their contract reasonably refuses to move, or if an employee without a mobility clause refuses to relocate, then you may find yourself with a redundancy situation on your hands. In this situation, it is best to seek advice in advance from your corporate or university HR department. 

Conclusion

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