A rocky road ahead for contractors claiming tax relief on travel and subsistence costs
November 16, 2015
- There is currently a 24 month rule for contractor travel and subsistence costs.
- Recent HMRC consultations are looking to restrict tax relief if there is supervision, direction and control (SDC) and personal service.
- The personal service issue can however be circumvented with right of substitution clauses; even better if a contractor does substitute himself or herself in practice.
24 month rule
Many of you who contract will know that if you work for over two years at one particular location, you are no longer entitled to claim tax relief on travel and subsistence (basically lunch) costs. This will not affect you if you stay with a particular client for 3-6 months and then move on.
So what has changed?
HM Revenue and Customs has been grinding away at this issue for a while as they see contractors, particularly those who are under umbrella companies, as having an unfair advantage compared to employees.
So far HMRC has published two consultations (December 2014 and July 2015), both with the aim of restricting travel and subsistence costs. The latest consultation extends this restriction to those of you who operate your own limited company and fall under the definition of a personal service company (IR35).
Many contractors try and circumvent the issue of personal service by having a right of substitution clause written into their contract; actually getting another contractor to substitute you makes the case for not being a personal service company even stronger.
Travel and subsistence costs will not be entitled to tax relief if the end client confirms that they supervise, direct and control (SDC) the contractor.
Examples of where this could apply are shown in HMRC’s Employment Status Manual page esm2056 onwards.
The changes take effect very soon – from 1 April 2016, even though the outcome of the latest consultation has not been published yet.
The Institute of Chartered Accountants (ICAS) response
ICAS, of which Lothian Accounting is a member has responded to HMRC’s latest consultation. Key concerns it has raised are that:
- Reliance on supervision, direction and control is too restrictive; the definition between employment and self- employment , independent contractor and IR35 have always considered more factors such as business risk and independence.
- Closer definition of temporary and permanent workplaces could produce a fairer outcome.
- There is a risk that end clients will use a default position of always confirming that supervision, direction and control exists to avoid any exposure to them of incorrect tax relief being claimed on travel expenses by contractors.
- The proposed changes to travel and subsistence expenses are relevant for “personal service” companies so contractors who have a right of substitution clause written in to their contracts are able to circumvent the rules anyway.
If you would like to talk more about how the changes to and travel and subsistence relief might affect your company, please call or drop me an email.