Own Limited Company 24 Month Rule

Many who are new to contracting and working through their own one-man limited company will be undertaking contracts of defined lengths.

These contracts will often come to an end, and although there is no mutuality of obligations between the contractor and the company they have provided services for, to provide & accept further work, a new contract will be offered & accepted.

Travelling expenses, rail fares or mileage, on short term contracts are allowable business expense for the contractor; however, care must be taken not to fall foul of the 24 month rule.

So what is the 24 month rule?

As soon as you are aware that your contract, or combination of contracts, will last for 24 months, and you do more than 40% of your work at the place you travel to, you cannot claim the travel costs as deductable expenses for tax purposes.

• These expenses are classified as ordinary commuting.

What if I have a 12 month contract and extend this by a further 12 months?

If you have a contract for twelve months, that is OK, claim the expenses. A further twelve month contract will mean that you now know you will be travelling to the same place for 24 months and this is ordinary commuting, no claim for any costs of travel for the second 12 month contract are allowed.

What if I have a contract for twelve months, one for 6 months and then a further 5 one month contracts?

Again, first 12 months OK and the second 6 months OK. The last 5 months do not take you up to 24 months and so should be OK. However, this could be challenged by H M Revenue & Customs, especially if you then go on to get a further contract with the same end user.

What if I have a 12 month contract in the City with one end user, and then move to another end user, still in the City?

One might think that this would be OK as you have an unrelated contract with a different client. In fact that is not the case. If the journey you are undertaking on the second contract is not significantly different to the first, the legislation states that these journeys are the same and disallows the expenditure.

• The cost of the journey must be significantly different from the first.

With the cost of travelling on the underground being in zones, there can be a large over ground difference in workplace with a similar total journey cost.

What if I have a break between contracts but travel to the same area?

HMRC give an example of a person on a 23 month contract, who after 17 months of the contract is called to another work place unexpectedly for 3 months and then returns to the original site for 6 months. One might expect that the travel is all allowable.

• On the contrary, the time working at the original site is now 17 + 3 + 6 = 26 months and 40% of working time has been spent there, the last 6 months is not allowable.

I work 3 days at a clients and 2 days from home for the same client, is the travel deductable for tax?

The 40% rule applies to this one. If you are working a five day week, then 60% of your time is spent at one work place and therefore if you have undertaken the journey for more than 24 months, the travel is not allowable.

• If you do 2 days at the client this would be 40% and therefore OK to claim, regardless of the time you have been making the journey.

There may be an argument that you actually work weekends and evenings as well from home in order to get the contract completed in the specified time.

• If this is the case, make sure that the contract states this and that you have kept time sheets to corroborate this.

This can be a complex area. If you, or your accountant is not aware of the details of the rules, you could be caught out and end up with an unexpected tax bill, interest and penalties by HMRC adding back these travelling expenses.

To make your life a lot less complex why not use the umbrella company service? Here we explain how to choose an umbrella company.