What is it?

Limited company directors, including independent professionals working through their own limited company – referred to by HMRC as Personal Service Companies (PSCs) - are currently able to claim tax relief on travel and subsistence expenses.

This means in many cases they can legitimately offset costs incurred when travelling to and from their clients’ premises and, where the those premises are a long way from their base, they can claim for temporary accommodation and food costs.

All expenses must be wholly and exclusively business related and must be considered ‘reasonable’.

What’s the 24 month rule?

With travel expenses specifically, the expenses are only allowable for 24 months. The whole basis of the rule is to give workers some relief when working at a temporary workplace. Beyond 24 months, this workplace is no longer considered temporary but classed as permanent, unless less than 40% of the time is spent on that specific workplace.

It should be noted that once it becomes clear that the engagement will exceed 24 months, the ability to claim for travel immediately ceases. In other words, you may not be able to claim for the whole two year period. If, for example, it’s a three year contract, you won’t be able to claim for travel at all.

Summer Budget 2015

The Government proposed to restrict tax relief on travel and subsistence expenses for workers who are engaged through an intermediary. For the purposes of this proposal, an intermediary could include ‘Personal Service Companies’. Their consultation document can be seen here. This would mean tax relief would be removed for workers who are “subject to (or to the right of) supervision, direction or control of any person” involved in the engagement.

HMRC consider the definition of the terms supervision, direction and control as follows: -

Supervision is someone overseeing a person doing work, to ensure that person is doing the work they are required to do and it is being done correctly to the required standard. Supervision can also involve helping the person where appropriate in order to develop their skills and knowledge. –

Direction is someone making a person do his/her work in a certain way by proving them with instructions, guidance, or advice as to how the work must be done. Someone providing direction will often co-ordinate how the work is done, as it is being undertaken. –

Control is someone dictating what work a person does and how they go about doing that work. Control also includes someone having the power to move the person from one job to another.

To support compliance with the restriction, the Government proposed to introduce one of two options:

Option 1 –

It will be the engager’s responsibility to confirm with the employment intermediary whether the contracted worker will be under the right of supervision, direction or control, to allow for the appropriate tax relief to be available.

If HMRC identifies that the rules for travel and subsistence tax reliefs have not been applied compliantly, and that inappropriate or false claims have been made, the engager for whom the worker provides their personal services, will be jointly and severally liable to HMRC for any outstanding obligations.

Option 2 –

The same as Option 1 but the liability for non-compliance would rest with the intermediary i.e. your limited company.

IPSE’s action

IPSE made clear to Government that we were deeply concerned by the proposal. We argued robustly that in many cases, clients will be unwilling to accept liability and will therefore refuse to confirm that supervision, direction or control is absent from the engagement. In effect the ability to legitimately claim relief would have be removed, even where the worker is clearly self-employed.

Through face-to-face meetings with HMRC, direct contact with the Chancellor, collaboration with other affected stakeholders, and a written consultation response including evidence from our members, we said these proposals would mean:

  • Many independent professionals would have been prevented from taking up contracts a long way from their base.
  • Some may have sought to raise their rates to compensate for the loss in relief, but their client may not have been willing to accept it.
  • Independent professionals would have been at a huge competitive disadvantage to the very large firms. While large consultancies (EY, KPMG etc) would have still been able to claim the expenses, consultants working through their own company would have not.
  • Clients, particularly those in remote locations, would have lost this vital, flexible, expert resource. Very often it is only amongst the ranks of the UK’s independent professionals that the expertise they need can be found.

Autumn Statement 2015

IPSE made sure the voice of limited company contractors was heard, and Government listened. In their Autumn Statement, they announced changes to tax relief on travel and subsistence will not affect so-called ‘Personal Service Companies’, unless IR35 applies. This means freelance businesses will rightfully be able to claim the tax relief, subject to future possible changes to IR35.

There is one small caveat to this rule. Contractor businesses that opt to pay out all of their company profits as salary will still have to consider whether IR35 would have applied had they distributed profits via dividends or retained profits in the company. If it would, the business will not be entitled to tax relief on its T&S expenses. Apart from in this rare circumstance, the rules on T&S are closely aligned to IR35 – if the engagement is not IR35 caught, the contractor is entitled to  claim T&S. If the engagement is IR35 caught, T&S relief is not available.

The relevant sections of the Finance Bill can be found here. Section 339a of this guidance document covers the legislation relating to those operate through their own limited company.