Contractor Travel Expenses

Question, Contractor Travel Expenses: I am a limited company contractor and I have been working on an 18 month contract which is based at Cannon Street in the city of London (this was my first contract). My contract is due to finish soon after which I will be taking on a 12 month contract with another client, also based in the city of London, but at Blackfriars. Will I still be able to claim my travel expenses on this new contract?

 

We hope you enjoy this article from our archives. As tax rules change a lot over time, the information in this post may not be current, but we hope you still find it interesting.

 

 

Answer, October 2016

The below answer assumes you are not caught by IR35 – new rules came in for the 16/17 tax year which block travel costs if you are caught by IR35.

Determining the travel expenses that can be claimed by your limited company can, in some cases, be difficult.

The main factors are the difference between a temporary workplace and a permanent workplace and also the location of the workplace in question.

Travel to a permanent workplace cannot be claimed as this is seen by HMRC to be regular commuting, whereas travel to a temporary workplace can be claimed.

In determining whether a workplace is temporary or not there are two main tests – the 24 month rule and the 40% rule.

The 24 month rule

As long as you are not working in a location for 24 months or longer the location will be considered to be temporary, therefore travel can be claimed.

However, if you sign a contract that means you are certain you will be in the same location for more than 24 months then you cannot claim travel costs. It is the point at which you know you will be there 24 months or longer at which the location changes from being temporary to permanent.

 

The 40% rule

Where the 24 month rule is breached there is still a chance to claim some of your travel costs if the location represents less than 40% of your overall business working time.

Below 40% and it will still be considered a temporary workplace. You need to look at the previous 24 months on a rolling 24 month basis all the time to see if the 40% rule has been breached at any point.

Once it is breached you have to stop claiming your travel, however keep your eye on the rolling 24 months position each month as you may go under the 40% again, at which point you can start claiming your travel again.

On the face of it, for your scenario, you would think that there is no issue as there are two separate contracts in two separate locations, neither spanning longer than 24 months.

However, where the workplaces are in similar locations and the route to that location from your home is similar HMRC can argue they constitute a single, permanent workplace, which would  block the contractor travel expenses.

You state that your second contract is also in the city of London – a factor in determining whether that is a separate location would be, for example, the tube station or line you use or the bus you needed to catch to arrive at the new location.

What is most problematic about your scenario is that there is no definitive answer as to when similar locations are treated as the same ‘patch’ or not – you need to make sure you have a strong argument and reasoning should HMRC investigate.

As both of your locations are in the relatively small area of the city of London (the ‘square mile’), we think that it is likely that HMRC would view these as being a single ‘patch’ and could seek to disallow the travel expenses for the second contract.

A potential way to work around this would be to request more time working from home to bring you below the 40% threshold or, where possible, request to work in a different office location if this is practical for the new client.