24-month rule for UK contractors

Introduction 

What is the 24 month rule for contractors from HM Revenue & Customs (HMRC) in the UK? How does this affect your ability to claim tax relief for employee travel expenses? Basically, these temporary workplace rules apply when you work through your own contractor limited company or work as a sole trader. Indeed, when you’re a contractor, HMRC rules need considering in respect of your contractor travel costs. Basically, many ask can contractors claim travel expenses? Moreover, they’ll ask if they can go about claiming travel expenses from home to work through a UK contracting role. In this guide, we’ll look at the 24-month rule (HMRC) in detail. Indeed, we’ll research how this works when running your own business.

When we consider travel charges for contractors, how can you claim travel expenses on taxes? If you’re a contractor who runs your own company, are you aware of the current rules? When you’re contracting and incur business travel expenses, HMRC temporary workplace rules set out what you can and can’t claim. Therefore, let’s take a look at what is the 24-month rule (HMRC). In addition, let’s look at how this affects your ability to claim tax relief on travel expenses and subsistence costs.

When we consider can a contractor claim travel expenses, they can if these are genuine business costs. When you are claiming travel expenses as a contractor, they’ll make a difference to your overall take-home pay. This is indeed true for your contractor travel expenses when you commute a long distance to your place of work. Therefore, when you’re claiming travel expenses to work each time you travel there and back is of course the best outcome. However, when claiming travel expenses, HMRC have some temporary workplace rules and these need considering before you can make a claim.

Initial thoughts 

First considerations 

In general, the cost of work travel expenses for UK contractors and regular employees in relation to commuting between home and a permanent workplace isn’t a business expense. As a result, you’re unable to claim this against tax through your contracting business. As a self-employed person or an employee, you can’t claim these on your tax return either. If an employer pays or reimburses the cost to the employee, this’ll be taxable on the latter, just like any other form of income.

Therefore, when we consider allowable HMRC travel expenses, the rules around a temporary workplace require careful consideration. One way of putting this is when does a contractor become an employee (UK)? I.e., when are their travel from home to work no longer tax-deductible? In this guide, we’ll look into the existing rules from HMRC (business travel expenses) in detail. We’ll also explain how these work for you as a contractor.

Common questions 

There are many common questions from contractors and workers alike, regarding when they can claim work travel expenses. Indeed, such questions on when are travel expenses taxable or tax deductible include:

• Can you claim travel expenses for work?

• Are business travel expenses taxable?

• How do I claim travel expenses on taxes?

• When can I claim work travel expenses?

• If I’m claiming travel expenses for work, what are the rules? 

In this guide, we’ll take a good look at the above. As part of this, we’ll consider when you can claim work travel costs and what to bear in mind when you do this. 

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

Please take 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 isn’t taxable. In this case, when you’re an IT contractor being paid for travel by your company, the business will also receive temporary workplace tax relief on your contractor travel expenses via its tax bill.

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

The rules which cover a temporary workplace aren’t a straightforward subject for limited company contractors. Therefore, if your accountant doesn’t know the rules what should you do? A good start will be to find an accountant who has knowledge in such areas. In this case, please look at how you can change your contractor accountant.

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

What type of IT contractor expenses, other contractor expenses or even employee travel expenses are we talking about? In effect, these include any costs you incur when you travel to a worksite. Therefore, when you’re claiming travel expenses as a contractor, you should to check if you can claim these. Such small business travel expenses (UK) will include:

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

• Rail fares.

• Taxi fares.

• Flights.

• Overnight accommodation in hotels or B&Bs. 

• Renting temporary or semi-permanent accommodation for contractors and any associated costs.

• Business meals.

• Personal Incidental Expenses (PIEs).

What to consider in respect of the 24-month rule (HMRC) for contractors 

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 doesn’t mean the client to which 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.

If you’re likely to be at a worksite for limited duration e.g., six months or a year, the contractor rules in respect of travel won’t affect you and you’re able to continue claiming travel expenses on taxes. However, if you may be at a worksite for longer than two years or you expect to be, there’s two factors you’ve to consider as part of the temporary workplace rules for contractors.

The two rules to consider

The two main points which are part of temporary workplace rules are:

• A site where the employee has come to expect to work for over 24 months. It’s the reason why this guide is ‘The contractor 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 for temporary workplace relief (HMRC) within the second point above is a further 2-year contractor rule. This is known as the 40% rule. Therefore, for the site to be permanent, the contractor or normal employee spends must spend at least 40% of their working time on average at the worksite. If the time spent is less than 40%, you’re able to claim temporary workplace relief (UK) even if you’ve been or know you’ll be at the worksite longer than two years.

As a limited company contractor, you could potentially have two permanent places of work at the same time. 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 wouldn’t be tax-deductible. To clarify, this is because you’d 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’ve been at a worksite for longer than two years and then start a new contract which isn’t connected with their previous contract. Perhaps with a different agency or a different client but in a similar location. Per HMRC, if the business journey and contractor travel expenses between home and the new site are “substantially the same” they may not be treated as temporary workplace journeys. Indeed, “substantially the same” is when we compare the new journeys to those for the previous location. If this is so, HMRC may treat the journeys as if they were to the same site as the previous one. Therefore, if this is so, it’ll make it more likely that the HMRC 24-month rule will apply to your `new’ work too. This rule mightn’t seem logical, and it may even seem unfair. However, this is how it is.

A key point to note is HMRC hasn’t, to date, and probably never will define what “substantially the same” means. Therefore, when it comes to considering temporary workplace relief, accommodation, mileage and other travel costs will need careful consideration.

An example of the UK contractor 24 month rule (travel expenses)

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’s just around the corner. When judging whether journeys are substantially the same or not, this’ll be obvious in most instances. For any non-obvious instance, the contractor must come to their own judgement. Basically, they’ll 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 aren’t the same or similar as those of the previous one, the 24 months will start over. As a result, they’ll be able to claim for their employee travel expenses once again.

Keeping a record

When you travel by car to worksites and are claiming travel on tax, a record for the journeys to and from a worksite in a vehicle provided by you as the contractor should be kept. Indeed, this record should be made by you and be one that shows a mileage log of the journeys. What’s more, the mileage log needs to be a simple list of the dates when you travel. Further, the mileage list should also contain:

• Where from and where to.

• How far.

• When it’s 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.

Example of the HMRC 24-month rule for contractors 

Example (part 1) 

Let’s suppose a contractor provides contract 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 is tax-deductible. This claim provides that the journey doesn’t fall foul of the expectation of being there for 24 months. Indeed, this is as per the rule above.

Next, let’s 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’s consider the cost of journeys between home and the worksite again. As eighteen months is less than 24 months, it’s still ok to claim, and the costs will be tax-deductible.

Finally, let’s 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.

Example (part 2) 

From the moment of signing this renewal, the contractor expects the time he’ll 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 and from the client’s location remain as UK contractor allowable expenses 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’ve 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. What’s more, they spend more than 40% of their time there. As a result, they 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’s no set rules with regard to breaks in attendance and when the 24-month clock would start again. Therefore, what can be claimed when someone returns to the same worksite? Basically, 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 quite complex rules for you as a UK limited company contractor. This is particularly so when you make your employee travel expenses claims for business travel. Some of these rules for work-related travel expenses aren’t always very clear or easy to understand. Indeed, you may come across during your UK contracting career. A good contractor accountant will help guide you here. What’s more, they’ll help you navigate the rules around travel expenses for contractors. As a final note, 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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