NIM06400 - Class 1 NICs : Expenses and allowances : Travelling expenses : Employees working overseas

Position from 6 April 1993 to 5 April 2004

Regulation 19(1)(q) was introduced into the Social Security (Contributions) Regulations 1979 with effect from 6 April 1993 to align Class 1 NICs with the tax treatment under section 193 and 194 of the Income and Corporation Taxes Act 1988 (ICTA 1988) of travel expenses paid where an employee performs his duties wholly or partly outside the UK.

Where an employer sends an employee to work abroad the legislation provides that there will be no Class 1 NICs liability on the following expenses:

• the cost of any journeys from the employee’s home in the UK to the place of work and return journeys home
• the cost, where the employee’s work keeps him abroad for 60 days or more, of a maximum of 2 journeys per year by a spouse and children travelling to visit or accompany the employee to the place of work and up to 2 journeys home
• the cost of board and lodging outside the UK which has been met or reimbursed by the employer where the employment is carried out wholly overseas.

Unfortunately, the original legislation did not fully meet the original intention because the wording of the regulation meant that it served only to provide an exclusion where tax remained chargeable on the employee. This meant that where tax liability ceased but NICs liability continued no exclusion for NICs was available.

This position was corrected from 6 April 2001 and tax and Class 1 NICs are now fully aligned on this issue and the exclusions outlined above will therefore apply where an employee is working abroad but a liability for NICs continues.

Until 6 April 2004, the legislation was contained in regulation 25 and paragraph 4 of Part VIII of Schedule 3 to the Social Security (Contributions) Regulations 2001.

See SE34000 for further guidance on what can be allowed under sections 193 and 194 ICTA 1988.

Position from 6 April 2004

With effect from 6 April 2004 the Social Security (Contributions) Regulations 2001 were amended in recognition of the coming into force of the Income Tax (Earnings and Pensions Act) 2003 (ITEPA 2003).

Although ITEPA 2003 did not change the meaning of existing tax law, its language, construction and numbering changed.

As a consequence the NICs legislation was amended with effect from 6 April 2004 to reflect the new ITEPA 2003 provisions. The NICs exceptions now contained at paragraphs 4 to 4D of Part VIII of Schedule 3 disregard from earnings:

• a payment of, or a contribution towards, expenses that are deductible for income tax purposes under section 341 ITEPA 2003 (Travel at start or finish of overseas employment);
• a payment of, or a contribution towards, expenses that are deductible for income tax purposes under section 342 ITEPA 2003 (Travel between employments where duties performed abroad):
• any amount which, by virtue of section 370 ITEPA 2003 (Travel costs and expenses where duties performed abroad: earner's travel) is deductible from taxable earnings
• any amount which, by virtue of section 371 ITEPA 2003 (Travel costs and expenses where duties performed abroad: visiting spouse's or child's travel) is deductible from taxable earnings
• any amount which, by virtue of section 376 of ITEPA 2003 (Foreign accommodation and subsistence costs and expenses (overseas employments) is deductible from taxable earnings, and
• any expenses or amount that would be so allowed or deductible under any of the above tax provisions if the employee's earnings were subject to income tax.

The changes to Part VIII of Schedule 3 ensure that the NICs treatment of travel costs and expenses incurred by employees working abroad is aligned with the corresponding tax treatment and continues to exempt from NICs liability those types of payments which were disregarded prior to 5 April 2004 (as outlined above). The NIC provision also means that where the employee is not taxable but remains liable to NICs the expenses will still be capable of being disregarded.

See EIM34000 onwards for further guidance on the ITEPA 2003 sections quoted above.