24-month rule for UK contractors

Introduction 

What is the 24-month rule for contractors, and how does this relate to when you claim tax relief for employee travel expenses through your contractor limited company or as a sole trader? These thoughts include claiming travel expenses from home to work through your contract role. Therefore, how can you claim travel expenses on taxes? If you are a limited company contractor who runs your own company, are you aware of the temporary workplace rules? Now, let’s take a look at what is the 24-month rule (HMRC) and how this affects your ability to claim tax relief on travel expenses and subsistence costs.

When you are claiming travel expenses as a contractor, these will make a difference to your overall take-home pay. This is especially true when you commute a long distance to your place of work. Claiming travel expenses to work each time you travel there is of course the best outcome. However, when claiming travel expenses, HMRC have some temporary workplace rules which you have to consider before you do this.

In general, the cost of work travel expenses for UK contractors in relation to commuting between home and a permanent workplace is not a business expense. As a result, you are unable to claim this against tax. If an employer pays or reimburses the cost to the employee, this will be taxable on the latter, just like any other form of income. Therefore, when it comes to allowable HMRC travel expenses, temporary workplace rules will require careful consideration.

Initial thoughts -temporary workplace rules and the 24-month rule (HMRC) for contractors

Please note that the cost when you travel to a temporary workplace is a tax-deductible expense. If an employer pays or reimburses such employee travel expenses, the amount the employee receives is not taxable. The business will also receive temporary workplace tax relief on your contractor travel expenses via its tax bill.

Further to this, there is no definitive definition of what a temporary place of work is. Indeed, this is except to say that it is not a permanent one.

The temporary workplace rules are not a straightforward subject for limited company contractors. Therefore, if you would like an accountant knowledgeable in such areas and you feel your accountant is not up to this, please look at how you can change your contractor accountant.

The types of costs that the 24-month rule (HMRC) applies to 

The types of employee travel expenses we are talking about will include any costs which you incur when you travel to a worksite. Therefore, when you are claiming travel expenses as a contractor, you should to check if you can claim these. Such small business travel expenses will include:

• Business mileage in your private car or your private bicycle or motorcycle. 

• Rail fares.

• Taxi fares.

• Flights.

• Overnight accommodation in hotels or B&Bs. 

• Renting temporary accommodationand associated costs.

• Business meals.

• Personal Incidental Expenses (PIEs).

24-month rule (HMRC) for contractors -what to consider

What is a permanent worksite?

When it comes to employee business travel expenses, a permanent site is defined as the only place of work for the employee while working for the employer. In this context, the employer does not mean the client you provide your services. For a UK contractor, neither does it mean to any agency via whom you do your work. Where a UK contractor provides their services via their own company, their company is the employer. Therefore, there are two factors that you have to consider as part of the temporary workplace rules:

• A site where the employee has come to expect to work for over 24 months. It is the reason why the heading above is ‘The 24-month rule.’

• `Expectation’ means that the employee knows the position. For example, the employee has signed a contract extension that bases them at that contract site for longer than 24 months.

Furthermore, another item to consider in relation to temporary workplace relief within the second point above is a further rule. This is known as the 40% rule. Therefore, for the site to be permanent, you would need to spend at least 40% of your time on average at the worksite.

Notably, as a limited company contractor, you could potentially have two permanent places of work simultaneously. For instance, you could be spending 50% of your working time at one worksite and 50% at another site. Your UK contractor travel expenses between home and either location would not be tax-deductible. To clarify, this is because you would be commuting to two permanent places of work. However, your journeys between the two sites would be tax-deductible.

There is a further twist to the HMRC travel expenses 24-month rule 

A contractor could take on a contract which is not in connection with their previous contract. Perhaps with a different agency or even with a different client. In this case, it turns out that the contractor travel expenses between home and the new site are “substantially the same. Indeed, this is when we compare them to those to and from the previous location. If this is so, HM Revenue & Customs (HMRC) will treat the journeys as if they were to the same site as the previous one. Therefore, if this is the scenario it will make it more likely that the HMRC 24-month rule will apply to your `new’ work too. This rule might not seem logical, and it may even seem unfair. However, this is how it is.

Key to note, HMRC has not, to date, and probably never will define what “substantially the same” means.

HMRC’s example for the contractor expenses 24-month rule 

The example which HMRC quote in their literature on the subject concerns a person whose next contract is with a different agency. The services are for a different client but one whose worksite is within a short distance of the former worksite. In their example, it is just around the corner. When judging whether journeys are substantially the same or not, this will be obvious in most instances. For any non-obvious instance, the contractor must come to their judgement. Notably, they will then have to hope this is right or proceed to submit the facts to HMRC to seek their opinion.

When a contractor relocates to a different site in a working context and the journeys that are not the same as those of the previous one, the 24 months will start over. As a result, they will be able to claim for their employee travel expenses once again.

A record for claims for miles which you travel to and from a worksite in a vehicle provided by you as the contractor should be kept. This record should be made by you and be one that shows a mileage log of the journeys. The mileage log needs to be a simple list of the dates when you travel. The mileage list should also contain:

• Where from and where to.

• How far.

• When it is not apparent, the purpose of the journey.

Whenever possible, there should be a record of all other forms of travel in relation to your limited company travel expenses. This will include the costs of staying overnight in accommodation closer to the client’s site rather than at home. These costs including any limited company subsistence expenses should be backed up by tickets, receipts, and invoices. Without such third-party proof, HMRC might reject the claim.

Illustration of the HMRC 24-month rule for contractors 

24-month rule example

Suppose a contractor contracts to provide services to a client for nine months. This length of time is less than 24 months. It would mean that the cost of contractor travel expenses between home and the clients’ worksite will be tax-deductible. This claim provides that the journey does not fall foul of the expectation of being there for 24 months. Indeed, this is as per the rule above.

Next, let us move on to the end of the nine months contract. The client requests the contractor, who accepts, to renew the contract for a further nine months. Because the worksite is the same, HMRC would regard the two continuous periods as one in this context. Therefore, the period working at the site has now become eighteen months. Furthermore, in the context of not falling foul of the expectation of being there for the HMRC 24-month rule above, let us consider the cost of journeys between home and the worksite again. As eighteen months is less than 24 months, it is still ok to claim, and the costs will be tax-deductible.

Finally, let us move on to the end of eighteen months. The client requests the contractor, who accepts, to renew the contract for a further nine months. The total of the continuous periods at the same worksite has now become twenty-seven months.

24-month rule example (continued)

From the moment of signing this renewal, the contractor expects the time he will be working at the client’s site is more than 24 months.  Therefore, the HMRC 24-month rule applies from that moment onwards, and the site has become the contractor’s permanent place of work.

Consequently, from that moment, the cost of journeys between home and that site are no longer tax-deductible. Therefore, to clarify, the expenses of journeying to the client’s location remain tax allowable up to the moment of signing the renewal.

Furthermore, what if the renewed contract terminates prematurely? The continuous periods at that client’s site become less than 24 months. In this case, the cost of journeying between home and that site after the renewal’s signing is still not tax allowable. To explain further here, this is because of the expectation that the position would have lasted beyond 24 months.

The 24-month rule (HMRC) -breaks in attendance 

A contractor may have worked at a particular worksite for more than 24 months (and spends more than 40% of their time there) and can no longer claim their travel expenses to get to and from that worksite. The contract work may finish for one reason or another; however, the contractor returns to this worksite in the future.

There are no set rules with regard to breaks in attendance and when the 24-month clock would start again when someone returns to the same worksite. However, a break for three or four months will probably be enough to justify a 24-month rule reset once the contractor returns to the site.

Final thoughts 

As shown above, there can be some very complex rules for you as a UK limited company contractor when you make your employee travel expenses claims for business travel. Some of these rules for work-related travel expenses are not always very clear or easy to understand. A good contractor accountant will help guide you when you navigate the rules around travel expenses for contractors. We hope this guidance with regard to the temporary workplace rules and 24-month rule for contractors has helped to make these a little clearer.

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