The 2016 establishment of new rules regarding deductible expenses for contractors were meant to clarify what qualifies as a deductible expense relating to accommodations and travel. But the rules appear to have made things more complicated. So complex, in fact, that HMRC has to make determinations on a case-by-case basis.
In the simplest terms possible, workers cannot deduct accommodation and travel expenses unless those expenses are incurred as the result of working in a temporary workplace for fewer than 24 months. Furthermore, the deductions are only available to employees. A contractor working as a sole proprietor rather than an employee of a limited company would not be able to deduct accommodation and travel expenses.
Perhaps we can understand how this works by referring to the official Temporary Workplace Rule applied by HMRC. The language on the government's website states the following:
"A workplace is a temporary workplace if an employee goes there only to perform a task of limited duration or for a temporary purpose. So even where an employee attends a workplace regularly, it will be a temporary workplace and so not a permanent workplace, if the employee attends for the purpose of performing a task of limited duration or other temporary purpose."
That doesn't seem to help much. To clarify the matter, we have listed below three scenarios that should be easy to understand. Bear in mind that these scenarios assume contractors working as employees of their own limited companies.
Scenario #1 – Knowing in Advance that 24 Months Will Be Exceeded
Let's say you accept an assignment scheduled to last 30 months. You would not be able to claim accommodation and travel expenses at all because you know in advance that your workplace does not qualify as a temporary workplace under the law.
Scenario #2 – Accepting an Extension of a Current Contract
Let us assume that you accept an assignment for 18 months and the sign an extension for another 12. You can only claim accommodation and travel expenses up to the time you sign the extension, as you did not know at the time you accepted the assignment that it would exceed the 24-month limit. You will not be able to claim expenses incurred after accepting the extension.
Scenario #3 – Accepting an Open-Ended Contract
Assume you agree to an open-ended contract with no clear end date. You can claim expenses up to the 24th month, but not after.
In addition to the length of assignment, the 24-month rule also defines qualifying accommodations based on how they are used. For example, you might choose to rent a standard hotel room during the week and then return home on the weekends. Because these accommodations are directly related to the work you are performing for your client, you could deduct the cost of your hotel room.
However, perhaps you might choose to rent a cheap room for your exclusive use for the entire length of your contract, whether in a private home, hotel, or boarding house. Because the property owner is not free to rent out that room on the weekends, the government will contend that it qualifies as a dual purpose accommodation for you. In other words, you could choose to stay the weekend if you wanted to. In such a case you could not deduct the cost of that room.
It's easy to see how the 24-month rule leads to so much confusion. Your accountant should follow the same practice as the government and evaluate each case on its own merits. Otherwise, it's too easy to get it wrong.