Expenses claims for a contractor are always a sticky subject and a potential pitfall. Whereas some areas are pretty black and white, it often seems that others are deliberately shrouded in greyness, perhaps to satisfy some twisted equilibrium. Let’s start with some of the simple items first – by way of a recap.
In very basic terms, as described in the HMRC Employment Income Manual (EIM) 31660, it goes like this:
“For an expense to be an ‘allowable business expense’ and a non-taxable expense for an employee, it must be incurred ‘wholly and exclusively’ whilst carrying out duties of employment”
By that definition, you can clearly claim expenses for the following, if they are solely for business use:
- Business parking and congestion charges
- Accommodation (if necessary to work away from home overnight)
- Bank interest and charges (company held accounts only)
- Professional subscriptions/memberships
- Accountancy fees
- Computer consumables
- Books and publications related to the business of the company
- And similar items…
For a more comprehensive list, please download our expenses guide.
Likewise, there are some items that should never appear on an expense claim form:
- Everyday lunches, teas, coffees, breakfasts etc (unless for genuine business entertainment)
- Household bills (eg electricity, gas, water, council tax, rent, etc)
- Home broadband (unless specifically installed as a requirement of your company’s business)
- Travel to and from a permanent place of work (more on this in a moment)
- Personal grooming and business dress
- Private school and university fees
- Golf Club membership fees
- And similar personal lifestyle items…
There is a full list of these items in our expenses guide,
Let’s now examine one of the grey areas in more detail.
Travel Expenses (including the 24-month and 40% rules):
You can claim travel expenses (including related expenses such as subsistence) if you are required to travel to a temporary workplace. This statement requires us to define exactly what constitutes temporary or permanent workplaces. So, here goes:
If your contract requires less than 40% of your time (i.e. 2 out of 5 working days per week) it is defined by HMRC as a temporary position and therefore the place you travel to for that specific contract will be a temporary place of work. Here’s an example; Mary works 5 days per week and has 2 clients. Mondays and Tuesdays, she travels to Enfield and works with Company A. Wednesday, Thursday and Friday are spent in Watford working with Company B. Her travel to Enfield can be claimed as it is a temporary place of work, irrespective of how long her contract lasts, as long as her working hours never exceed 40% of her working time.
Now let’s look at Mary’s contract with Company B. She spends 60% of her time with them, so based on her working hours HMRC could classify this as a permanent place of work. This is where the 24-month rule comes into effect. Mary has been working with Company B under a 6-month contract which will shortly be renewed. At the start of her contract Mary was correct to treat this as a temporary work place as the contract is for less than 24 months. Company B are delighted with Mary’s performance and have offered her a 2-year contract. Mary accepts the contract. Her place of work is now classified as permanent – by adding her contract periods together her place of work will be the same for 30 months, HMRC will consider this a permanent place of work. Mary will need to stop claiming her travel expenses immediately.
What could Mary have done differently? If Mary had negotiated with Company B to renew her contract for 18 months, with no guarantee of renewal, her place of work would be considered temporary as it would be less than 24 months in total. If at the end of her second contract a further contract period was agreed, she would have to stop claiming travel expenses at that point.
If that wasn’t complicated enough, you also have to consider what ‘place of work’ actually means. It’s not about the company you are contracting with but the location you are travelling to. So, what happens when William finishes a contract with one company and starts another with the firm next door? His travel is identical – he leaves home, takes the bus to the train station and the train drops him off in Euston where he walks to the office. It could be argued that his ‘place of work’ is Euston and therefore the 24-month rule could span both contracts. This, like so many technicalities, is a grey area but one contractors should be mindful of.
PS Don’t forget the golden rule of keeping your business and personal finances separate so pay your business expenses from the company bank account rather than paying the personally and reimbursing yourself. I’m sure you don’t want HMRC trawling through your personal finances during an investigation do you?
PPS And if you’re claiming mileage from your company for your private car don’t forget the app we mentioned in a previous newsletter, Mile IQ. It’ll save you lots of time and provide perfect evidence if HMRC do come sniffing around.