Working as a contractor entails a lot of costs and claiming your business expenses can be a nightmare if you don’t fully understand the rules, especially the HMRC 24 month rule. How do you know which contractor travel expenses you can and cannot claim?
The easiest way to decide if a certain cost counts as a business expense is to decide if it was incurred ‘wholly and exclusively for business purposes’. However, the devil is in the details and there are a lot of caveats to be taken into account to ensure you’re claiming your contractor travel expenses in the most efficient way possible.
Our guide to understanding the key rules set out by the HMRC:
Frequently Asked Questions:
- Can I claim travel expenses if I drive to different locations to attend different clients?
- Can I start claiming travel expenses if I change location but still work for the same client?
- Can I claim expenses if I travelled for an interview?
- Can I claim travel expenses if I’m inside IR35?
- What travel expenses can I claim as a contractor?
- How can I claim travel expenses as a contractor?
- Quick Tip – How can I keep track of my trips and make sure I’m billing my clients correctly?
1. The 24 Month Rule
Travelling frequently is normal as a contractor and this often incurs accommodation costs and other travel expenses. The HMRC 24 month rule, in the simplest terms, is one of the ways that HMRC uses to decide whether a workplace is permanent or temporary.
You can only claim expenses working away from home if you’re staying at a workplace for less than 24 months. Any contract with a limited company that lasts longer than this is seen by the HMRC as a permanent place of work.
The HMRC 24 months rule might sound strange, as 2 years is by no means what most people would consider permanent. However, according to HMRC, a workplace counts as permanent if you are working there for over 24 months. This is because it becomes your regular workplace rather than a shorter temporary project.
For contractors and freelancers, this means you are no longer eligible to claim expenses as soon as you know you’ll be in the same location for more than two years. For example, if your contract lasted one year and then your employer offers to extend this for another year, you can no longer claim contractor travel expenses as soon as you have signed the new contract. If you’re not sure how long a contract will last, then, in this case, you can continue claiming expenses until you reach the 24 month deadline.
2. The 40% Rule
The HMRC 24 month rule applies to most contractors unless you’re covered by the 40% rule. This rule states that if you spend less than 40% of your working week at a site, then it counts as a temporary workplace. Meaning, if you’re spending less than 40% in a workplace you can continue to claim contractor travel expenses, no matter how long the contract lasts.
Example: You are a Management consultant and you work from Monday to Thursday in your client’s headquarters in Manchester, which happens to be a shipping company, while working Fridays in their fulfilment centre in Liverpool.
Since you are working less than 40% of your working week in the centre, you would be able to keep claiming travel expenses for your business journeys to and from Liverpool, including mileage, for longer than 24 months – so you could ignore this rule if this is your situation.
3. The 24 Month Rule Reset
If you take a break from working at a location, you are still under the HMRC 24 month rule for that workplace. This is because the rule works on the basis of a ‘rolling window’, which means, if you return to a workplace, your start date is still classed as the first day of your original contract.
Any break from a workplace would have to satisfy the 40% rule. For the 24 month rule to reset, you would need to have had a break of a minimum of 15 months (60% of 24 months, showing you’ve been there less than 40% of your time).
You also need to have worked at a different site during this break. Otherwise, you will still be under the HMRC 24 month rule and unable to claim expenses after 2 years, even if you have been away from your workplace for some of that time.
Example: You’re working in one location for a year. You then work for a different company in a different location for 14 months. At the end of these 14 months, you return to your first location, so you’ve taken a 14-month gap before returning to your first contract.
The gap is less than 15 months so you will be unable to claim expenses. This is because the HMRC will still consider the first location as a permanent workplace and the 24 month rule is counted from your start date.
Can I claim travel expenses if I drive to different locations to attend different clients?
For each contract or client, you will need to abide by the HMRC 24 month rule separately. As long as you spend less than 24 months at the company or under 40% of your time at each location, you can always claim contractor travel expenses.
If however, you have any contracts which require more than 40% of your time and last for over 24 months, then for those contracts you will no longer be able to claim travel expenses. This is because your travel to these clients will count as commuting to your regular place of work.
Can I start claiming travel expenses if I change location but still work for the same client?
The HMRC 24 month rule always applies to the location rather than the client. You can claim expenses working for a long term client if the location changes for a shorter period than 2 years, but only if the change significantly affects your journey in terms of cost.
Example #1: Your client requests for you to work at another location they own, which is a 25-mile longer drive from your home. The costs for your journey would clearly be higher than your normal commute. In this case, the 24 month rule resets as it counts as a new workplace.
Example #2: Your client moves their office to a new location which is in the same area and a similar distance from your home to their previous office. The travel cost for you would remain the same and the journey would be very similar. In this case, it would not be considered a new site and the 24 month rule would continue to run from the start date of your original contract.
Can I claim expenses if I travelled for an interview?
Interviews do not count as business travel expenses as it is not an expense of your current employment. Therefore, the travel expenses for any interviews will have to come out of your own pocket. The only way to be refunded for these costs is by asking the company who you are interviewing with to reimburse you. Of course, they may or may not agree to this.
Can I claim travel expenses if I’m inside IR35?
IR35 is a set of tax rules which apply if you work for a client through an intermediary, which could be a limited company or a ‘personal service company’. This is how many contractors operate. If this describes you, then you will pay around 25% more tax every year, so try not to work through an intermediary whenever possible.
For anyone who is inside IR35, all of your places of business count as permanent. This means that the HMRC 24 month rule does not apply, therefore, you will be unable to claim any of your mileage.
What travel expenses can I claim as a contractor?
Most of the costs incurred in attending a temporary workplace are allowable for tax deductions. Costs that can be claimed include:
- Business Mileage – HMRC has set mileage rates that you can use to claim mileage expenses tax-free, or you can use the actual expenses method to calculate your mileage deductions.
- Overnight and Meal Allowance – HMRC has also set rates that you can use to claim overnight and meal expenses tax-free.
- General Business Travel Expenses – Other travel expenses are also deductible, such as parking fees, tolls, and even public transportation costs.
How can I claim travel expenses as a contractor?
You would need to fill in a self assessment tax return at the end of the tax year with HMRC in order to claim your business mileage expenses back.
Quick Tip – How can I keep track of my trips and make sure I’m billing my clients correctly?
Here at Autotrip, we’ve developed a mileage tracking solution that helps contractors automate their mileage claims with ease.
Our plug and play GPS tracker records all of your mileage automatically, and our software lets you track your mileage separately for each one of your clients, saving you time every month in working out where you’ve been and what is chargeable.
It’s also important that you keep detailed mileage logs and copies of receipts as proof of evidence when claiming your expenses with HMRC – all of this can be stored in the cloud using Autotrip’s software.
Learn more about how we make mileage simple at autotrip.com and find out why 1000s of small businesses across the country use Autotrip.