Travel expenses for contractors, it’s not as simple as A to B. There are rules to follow and in this blog we’ll tell you what you can claim and what you can’t claim. As well as the 24 month rule and 40% rule which can often catch you out. Here’s what you need to know.
This blog focuses on travel expenses for contractors outside of IR35, and the advice here is not necessarily appropriate if you’re working via an agency or umbrella company, different rules apply. If you work as a contractor for your own Limited Company, this is what you need to know about your travel expenses.
What counts as a travel expenses for contractors?
To claim a travel expense, the travel must be between your limited company address and your temporary place of work. Your home is likely to be your Limited Company address, even if it is not your company’s registered office, and it’s likely you’ll travel to and from your temporary working address from home every day. If you have a separate office for your contracting business, travel expenses will only be applicable between that office address and your temporary contracting address.
Importantly, the location you’re travelling to to complete your contracted work must be a temporary working location, this is defined as a location you expect to work at for less than 24 months.
What can I claim for?
Travel expenses for contractors must be wholly, exclusively and necessarily incurred as a result of your contracted duties.
- Public transport (bus, train, taxi, ferry)
- Private transport (private car)
- Accommodation (hotel, B&B, temporary rented property)
- Subsistence, usually lunch with an evening meal if you stay overnight
- Incidentals (Up to the value of £5/night UK or £10/night overseas for smaller items like newspaper or laundry)
*NB: If claiming for accommodation you must still have a separate home address, ie: you can’t relocate for a contract and then charge for your rental accommodation
What can’t I claim for?
You can’t claim anything that isn’t wholly, exclusively and necessarily incurred as a result of your contracted duties.
What’s the 24 month rule and will it affect me?
This is where it gets a little complicated. Many contractors won’t have to worry too much about the 24 month rule, but it does come up from time to time.
If your short-term contracts keep getting renewed, you could find yourself working at one location for quite a while. If that time reaches or exceeds 24 months, it’s no longer seen as a temporary working address by HMRC and you won’t be able to claim for any of the travel expenses above.
You must stop claiming travel expenses as soon as you’re made aware that your time at this location will reach or exceed 24 months. So let’s say you’re contracted for 18 months, at the 18 month mark they renew your contract for a further 12 months – you cannot claim anything after that initial 18 months because you’re aware that your time working in that location will reach or exceed 24 months and therefore is no longer a temporary workplace.
All fairly straight-forward so far, but wait, there’s more…
When we say ‘one location’ we’re talking geographically, not necessarily your client’s business address, it’s not as granular as that unfortunately. If your journey to a contracted workplace is the same, even if the client and contract are completely different, it’s counted as the same location.
So if we use the example of a business park where there are 10 different businesses, you can’t complete up to or more than 24 months of work for businesses within the business park and still claim travel expenses. The business park location will not be considered to be a temporary working location.
HMRC seems to define a business location to be different if the journey taken and the expense incurred is different. So if a subsequent contract takes place in the same building or right next door to your previous contract and takes you up to or over the 24 month mark, it’s counted as the same location and there’ll be no claiming of travel expenses allowed.
Ok, so that was a little complicated, but wait, there’s more…
The 40% rule
Just to throw another spanner in the works, there’s the ‘40% rule’ to consider too. Some contractors find themselves working on multiple contracts at any given time, eg: 1 day/week for business X and 4 days/week for business Y. If the locations of business X and business Y are significantly different in terms of journey and expense incurred, the contractor will be able to claim travel expenses for longer than 24 months – but only IF they don’t break the 40% rule.
The 40% rule says that if a contractor is spending more than or equal to 40% of their working time in a location for up to or over 24 months, they can no longer claim travel expenses. So in the case of business X and business Y, the contractor can claim travel expenses to business X indefinitely, but cannot claim travel expenses over the 24 month mark for business Y.
The 40% rule also applies to returning to a previous location, even though it really shouldn’t. Imagine you had an 18 month contract at the business park, then a 2 month break without a contract. Now you’ve just landed another 12 month contract back at the business park for a different client – you won’t be able to claim your travel expenses because if you look back over the last 24 months in total, you spent more than 40% of your time working at that business park location. Therefore all travel expenses relating to your new 12 month contract cannot be claimed.
We agree it doesn’t seem fair, especially for contractors who have regular clients within their area. In addition, HMRC have stated that the rules are “…purposely written to be forward looking…”, be aware that HMRC frequently penalise people by looking back over the previous 24 months.
Remember, if you’re in any doubt, call us and speak with your accountant at Warr & co who will be able to confirm whether or not you can claim. If you’re not currently a client but would like to discuss your travel expenses, why not call us for a free no-obligation conversation about your contracting business? Call us on: 0161 477 6789 for the Stockport office and 020 3174 1436 for the London office.