REVISED EXPENSES RULES
INTRODUCED BY
INLAND REVENUE
1998/99
onwards
This summary
is designed to give you our interpretation of the current rules. Please do note
that the only authoritative ruling on expenses claims is agreement by an
Inspector of Taxes concerning your particular situation. The notes are not
meant to be exhaustive, do please contact us if you want clarification or any
more information.
At present the ‘IR35’ regulations do
not amend these - help yourself whilst the going is good. Eventually the
Pfennig will drop and these rules will be re-drawn back the way they used to
be. It is important to remember that these expenses are only those which
qualify under the accounts of your business.
The only expenses deductible under IR35
are listed in the Revenue notes available on their website, or from us –
broadly your own Salary, Travel, PI Cover and Pensions and the infamous 5% of
IR35 billings. This does still add up to a ‘good deal’ compared to a PAYE
employment in many situations.
TAX RELIEF ON
EMPLOYEE TRAVEL
RULES FROM 6 APRIL 1998
·
SUMMARY OF
EXPENSES RULES
·
DEFINITION
OF PERMANENT WORKPLACE
·
“24 MONTH
RULE”
·
NATURE OF
A BUSINESS JOURNEY
·
ALLOWABLE
EXPENSES
Employee Travel
Tax and NIC relief
The
Inland Revenue have introduced their interpretation of the new rules on
employee travel expenses. These new rules apply to journeys made on or after 6
April 1998 and are summed up by them as follows:
“From
6 April 1998 employees are entitled to relief for the full cost they are
obliged to incur in the performance of their duties or travelling to or from a
place they have to attend in the performance of their duties – as long as the
journey is not ordinary commuting or private travel.”
-
a precise statement
supported by 50 pages of rules and regulations to try and prevent just this !!
In
order to establish whether a particular journey is allowable or not, we need to
establish whether or not it is ordinary commuting. The Inland Revenue say that
ordinary commuting is travel between the employee’s permanent workplace and
a)
The employee’s home;
or
b)
Another place visited
for non-work reasons; or
c)
A place where another
job is carried out.
Obviously, the next factor is to
consider is what constitutes a permanent workplace. The Inland Revenue regard a
workplace as permanent if it is visited regularly in the performance of the
employee’s duties. Regular means the attendance is frequent, forms a pattern,
or is where the vast majority of the duties are carried out.
There is light at the end of the tunnel.
If attendance at a workplace is for a limited duration, or is only temporary,
then it will not be regarded as a permanent workplace, and therefore travel to
and from it is an allowable expense. If your visit to a site is “self
contained” i.e. arranged for a particular purpose, then it is likely to be
deemed to be for a temporary purpose.
If you visit a site regularly, say once
a week, but the task performed at that site is of limited duration or for a
temporary purpose, then the site will not been deemed to be a permanent
workplace. It is assumed that as a contractor, the work you carry out will be
deemed to be of a limited duration, due to the nature of the work, and the fact
that your company has a fixed length contract with either the agency or the
client.
The aspect of the new rules which will
probably be of most interest and relevance to you is the “24 month rule”. This
rule will be applied by the Inland Revenue to effectively turn a temporary
workplace into a permanent workplace. The rule states that a workplace cannot
be a temporary workplace if the employee attends it in the course of continuous
work which lasts, or is likely to last, more than 24 months.
A test will be applied to determine
whether or not you will spend, or are likely to spend 40% or more of your
working time at a particular workplace over a period of 24 months. If the
Inland Revenue succeed in establishing that the workplace is not temporary,
then travel to and from it will not be allowable.
If the Inland Revenue agree that the
workplace is temporary, then tax relief is allowed on the travel costs until
the earlier of:
a)
24 months have
elapsed at the site; or
b)
the date a new
contract is signed which will take the total time at the workplace over 24
months.
For example, if you start at a new site on a 12 month
contract, and renew it after 12 months, then the first 24 months of travel is
allowable. If however, you sign a 12 month contract and renew it after 12
months with an 18 month contract, then tax relief is only available for the first
12 months until the date at which you knew you would be at the site for more
than 24 months.
The 24 month rule should be borne in
mind during contract negotiations and renewals, but don’t forget, it is the
time at a site which is important, rather than the length of the actual
contract.
Another important factor, is that the
Inland Revenue have said that if you move home, to be nearer your workplace, it
could be an indication that you intend to be at a site for longer than 24
months. They will not rely solely on this, but it could be used against you. If
you don’t move, you can always argue that it was because you didn’t intend to
be at the site for more than 24 months.
This aspect of the new rules is very
subjective, and will be open to judicial interpretation, but I suspect that the
Inland Revenue are relying on the fact that it is unlikely that it will be
worth any individual taking the matter to court.
Another area
left vague to suit the Inland Revenue, is breaks in continuous attendance. The
40% aspect of the test is likely to be used. Don’t forget, that if each visit
to the site is for a separate, unrelated, self-contained purpose, then the
length of each visit should not be added together.
For example, you are at a site for 18
months, then spend 3 months away and return to the site for a further 6 month
contract. You can get tax relief on the travel for the first 18 months, plus
the next 3 months at another site, but when you return you cannot claim tax
relief on the travel because you will be spending more than 40%
((18+6)/(18+3+6) = 88.88%) of your time at the site over a 24 month period.
Another point to bear in mind is that
strictly, if you only carry out only one contract throughout the life of your
company, even if it lasts less than 24 months, then no tax relief is available.
The Inland Revenue have clarified their
view on working from home. If they are satisfied that you work at home because
the nature of the work requires it, then your home will be treated as your
permanent workplace for tax purposes. If the Inland Revenue think that you work
from home because it is more convenient, then your home cannot be treated as
your permanent workplace. The advantage of having your home treated as a
permanent workplace is that travel from home to another permanent workplace is
allowable. This is a very difficult area, and I would suggest that unless you
spend more than 40% of your normal working day at home, you should not try and
have your home treated as your permanent workplace.
It should be borne in mind that journeys
will only attract tax relief if they are deemed to be “necessary”. For your
normal day to day work, this should not be a problem, but if for example, you
travelled to your place of work to merely to attend a Christmas party, then
that journey would not be allowable.
There may be a temptation to change
one’s workplace every 24 months and the Inland Revenue have provided for this.
There must be a “significant” change in the journey undertaken. There are two
aspects which will be examined, the actual journey undertaken, and also the
cost of the journey. This can best be illustrated by way of examples:
If you are working in London on a
particular contract, and then move to a new contract, still within London, but
say, ten tube stops further on. This will not be regarded as a change in
workplace because the cost of the journey will remain the same, and the actual
journey will not be much different.
If you drove 25 miles south each day and
changed to a contract 25 miles north, this would be considered a change in
workplace because although the cost of the journey has not changed, the journey
itself has changed drastically (in the opposite direction).
The rule of thumb is that changes within
metropolitan areas are less likely to constitute a change than those within
rural areas.
If however,
the geographical change is small, but the new contract is for a specific short
term purpose, then relief can be claimed subject to the 24 month rule
If you specialize within a specific
field, then changes in contracts will be examined much more closely. If for
example, you deal in banking systems, and do most of your work within the City
of London, then the Inland Revenue have stated they will argue that the Square
Mile is your permanent workplace. This will be the same for any other sector
concentrated within a geographical area. We’d like to see the Revenue make this
stand up in Court ! Again, this aspect of the rules is a grey area and open to
interpretation.
Tax relief on the total cost of each
journey can be claimed. The route taken does not necessarily have to be the
shortest, but it should be the most “appropriate”. You can make a small detour
to avoid traffic or have a meal, but if you visit a relative on the way, you
must deduct the cost of the detour.
The costs include subsistence related to
the business travel. If you stay away from home during the week, and the
journey from home to the workplace has been deemed a business trip, then the
costs of the hotel, modest meals and daily travel is allowable.
Incidentals,
such as private calls, laundry, newspapers, in house films cannot be claimed if
paid for by yourself, but if your company settles the main hotel bill directly
then an average of £5 per night can be claimed by you form your company without
tax liability.
The actual cost of the trip or the
standard of travel or accommodation does not affect whether or not the trip is
allowable, but if the Inland Revenue think that the trip represents a reward or
celebration or is extravagant they will disallow the entire cost. Basically
business class travel is allowed, but limousines and helicopters are not.
Executive rooms are allowed, but honeymoon or presidential suites are not
(unless you are a President of course).
If you use
your own car for business trips the mileage can be recovered using the Fixed
Profit Car Scheme (FPCS) rates without any tax liability for yourself
personally, unlike if you put the car on your books as a company vehicle. We
have listed below the rates for the year ending 5 April 2006.
|
Business Mileage – per
mile |
Cars |
Motorbikes |
Bicycles |
|
First 10,000 miles |
40p |
24p |
20p |
|
Over 10,000 miles |
25p |
24p |
20p |
These rules, will mean that most
contractors can reclaim a fair amount of expenses. Do note however that there
is no higher rate for gas guzzlers so it is up to you to review the
effectiveness of the allowed rate for your car. Coupled with this however is
the need to keep proper records detailing the exact nature of each expense and
details of each business journey.
The Company car tax rules changed
significantly on 6th April 2002. It is unlikely that high mileage
company cars will be tax effective under the new rules, BUT BUT BUT BUT new
perk cars are likely to be better off. We can do an appraisal for you (at
modest cost) if you let us have details of the proposed car, list price, age,
mileage split between business and personal, and likely repair costs pa.
Also do now bear in mind the exciting
IR35 expenses rules if you are operating within this regime. A much more limited
range of expenses is open to you, and you should talk to us before expending
significant amounts on most things. We can of
course draw up an IR35-resistant contract for a modest greasing of our palms
which will assist in establishing your independent business status with HMIT.
Monday to Friday on
+44 (0)170 885 5275 (or 079 7610 2345)
our fax
numbers are +44 (0)170 840 4508 or (0)170 867 0790
at info at abell morliss
post to:- Enterprise House, 5 Ardmore Road,
South Ockendon, Essex RM15 5TH, United
Kingdom
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Morliss LimitedÒ Chartered
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House 5 Ardmore Road
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END