Post April 2016 – changes to the rules concerning travel and subsistence expenses
Back in 2014 the Chancellor signalled that the ability for contractors to claim (and therefore obtain a tax benefit) the cost of travelling from home to work (and associated food costs) as unfair (travel and subsistence). Such a benefit is not available to permanent employees of the end client, therefore should not be available to contractors. In effect, the playing field would be levelled.
The April 2016 Budget brought about new rules concerning travel and subsistence costs for contractors working via intermediaries such as umbrella companies and their own limited companies.
Workers who are subject to ‘supervision, direction or control’ of the end client – which is essentially whether the contractor is considered to be within IR35 – can no longer claim for travel and subsistence costs as expenses. As such they should not obtain tax relief on such costs.
In simple terms, if you are working via a limited company and, based on the way you work and the terms of your written contract, you are considered to be working inside IR35, you should not claim home-to-work travel expenses or the cost of meals or refreshments whilst at work.
Conversely, if you are satisfied that the way you work would be considered to be outside IR35 you are not affected by the new rules. All legitimate business expenses can still be claimed.
A note on business expenses – as a reminder, a business expense is a cost which is incurred and is ‘wholly and exclusively’ in connection with the trade. If you would pay the cost anyway (e.g. for clothing, since everyone has to wear clothes!), the ‘wholly and exclusively’ test is failed and you should not claim the cost as a business expense.
That’s not to say a cost can’t have two purposes – that is both business and personal use. This is referred to as ‘duality of purpose’. For example, you may use your home broadband for both personal and business use. In this case, it is reasonable to claim an element of the cost of the broadband; if you feel your internet usage is business related 20% of the time, claim 20% of the cost.
I consider the way I work to be inside IR35/I’m under supervision, direction or control of the end client – what should I do?
Being considered to be inside IR35/under SDC does not mean you shouldn’t work via a limited company (although some employment agencies seem to think it does!).
It does mean the way you account for money you take from the company changes.
The greatest tax benefit of working via a limited company is the ability to take money from the company by way of dividends. Dividend income is taxed at lower rates compared to employed income and there are no National Insurance Contributions associated with dividends.
If you are considered to be within IR35 you should not take dividends. Instead, you should take the majority of company income out as salary and suffer deductions for income tax and NICs.
HMRC would like to see you take 95% of company income as salary (the 5% being an allowance to run the company). However, there are certain expenses that can be claimed against company income BEFORE you take salary which may add up and be more beneficial than the 5% allowance. Such as:
- Mobile phone – if the contract is in the name of the company and paid for from the business bank account, all costs associated with the mobile phone (monthly subscription, call charges, cost of a new phone) are allowable as a business expense.
- Use of home for business purposes – if you run your company from home HMRC allows you to claim up to £4 per week (or £18 per month) as a contribution to home costs. Anything above £4 per week/£18 per month is classed as a ‘significant’ expense by HMRC and should they look in to the expense may want to see records and calculations.
- Contributions to a personal pension plan – the company can make contributions to your personal pension plan. There are limits which are fairly high. The company saves tax on the cost of the contributions, you grow your pension pot – a win-win situation!
- Childcare vouchers – if set up correctly (please ask for further advice) the company can pay a provider directly for the cost of childcare. Up to £243 could be paid to the provider each month, per company employee!
- At-work business travel – whilst ordinary commuting can no longer be claimed, the cost of business journeys made whilst at work can still be claimed.
- Additional company employees – is your spouse or partner making use of their Personal Allowance? If not, why not employ them by your company and pay them a modest salary. The salary paid to employees reduces company tax, whilst the income to your spouse or partner is likely to be tax-free.
- Non-taxable employee benefits – up to £150 can be spent on an annual party and up to £50 on trivial benefits, per employee. Get tax relief whilst having a party on the company!
All these costs legitimately reduce tax payable by the company, and also reduce the amount which is left over from which to pay your salary.
They represent things you can get the company to pay for instead of having to pay them yourself. Combined, they may also represent a greater saving than the 5% allowance for running the company.
Please don’t hesitate to talk to your accountant for more guidance.
A note on ‘supervision, direction or control’ – what do they mean:
Supervision is considered to apply if your work is managed in such a way to ensure you are performing to a set standard.
Direction applies when you are made to work in a certain way (i.e. under instruction).
Control applies when someone is able to dictate what work you do.