Contractors' Questions: Can my 'Ltd' submit expenses I claimed as an employee?

Contractor's Question: I was working for a company for 10 years as a PAYE employee. The place of work was an office building on a site complex with up to 20 other office buildings. I was working away from home 5 days a week commuting about a 600 mile round trip from home to the described place of work. As part of my employment, I received a tax-free weekly lodge allowance and train fare once a month. Although I was made redundant in February, I have an offer of a job on a 12-month contract on the same site complex, though in a different building and I have to be a limited company. My home location has not changed. Under the 2-year rule, can I claim mileage and other expenses, like I did before when I was a PAYE employee?

Expert's Answer: Before I answer directly, I assume that you, the worker concerned, received tax-free allowances for the previous 10 years even though attendance was at the same workplace throughout. I assume that these payments were made within a Working Rule Agreement. Now to the answer. There is no definitive answer and there are a number of schools of thought. HM Revenue & Customs do not address the problem specifically but I can provide my opinion.

There are a number of tests to pass for you to have a valid claim. When a person joins a company, it has to be the case that they will be moving from workplace to workplace (or likely to or it is reasonable to assume), as to work at one workplace throughout the whole of the employment is not good enough to pass. As you will be running your own limited company, and on the assumption that the company is actively seeking further contracts, HM Revenue & Customs will accept that the expectation of moving to other workplaces is present from the outset. Then there is the question of whether, when considering attendance at the first workplace, you take into account attendance at that workplace whilst in the previous employment. In this case, you worked at that place for the previous 10 years.

As you are working through a limited company (as opposed to an umbrella company which I explain below) the employer (your company) knows that the employee (you) has been at the same complex for the last 10 years. The redundancy was in February and assuming that the contract has started recently there is a break in attendance. However the so-called '40% rule' will prevent any allowance.

The relevant legislation is S339 ITEPA 2003 and it starts by referring to a workplace in relation to an employment, and talks about the performance of duties of the employment. This is obviously what must be taken into account when looking at the workplace, but when considering the 24-month, or 2-year, rule, what does the legislation say?

A place is not regarded as a temporary workplace if the employee's attendance is—
(a) in the course of a period of continuous work at that place—
(b) lasting more than 24 months, or... at a time when it is reasonable to assume that it will be in the course of such a period

Without doubt in your circumstances, there has been a lengthy period of work "at that place" and at this point in the legislation there is no reference to the employment. It is simply the "place" and the prospect of being able to claim does not look so good. The law does specify, however, that it has to be a period of continuous work so simply attending the workplace for a length of time is not sufficient. It has to be attendance in the course of a "period of continuous work".

The question then is - does the period of time at the workplace whilst working for the previous employer need to be aggregated with the period of time working for the current employer, in order to determine the continuous period? If it does, then the claim fails – if it doesn't, then the claim succeeds. The definition of a continuous period is:

For the purposes of subsection (5), a period is a period of continuous work at a place if over the period the duties of the employment are performed to a significant extent at the place.

Now, here we have a reference to the employment and the important phrase for your situation is "...over the period the duties of the employment..." That suggests to me that the employments are considered separately – it does not say the duties of the employment and any previous employment(s). The term "..the employment.." is quite clearly singular and can, in my opinion, relate only to the employment being considered.

Consider the same scenario, but the person works through an umbrella company. The start date is May 2010 – there has been a period of two/three months unemployed. The new employer will be concerned about the work at the current (i.e. the first site) and future sites, and will not be concerned about the workplaces attended during the course of the previous employment. Indeed the new employer would not have access to or any right to request information previous employments. It just so happens that in your case the previous history is known to the new employer for reasons that are obvious.

It has to be borne in mind that not only does the legislation apply to employees wishing to claim but also to employers in deciding whether travel expenses can be paid tax-free. When an employer applies the law in respect of expense payments being made to employees, the employer must apply the law as in S339 and when S339 refers to an employment it can be to that employment alone. In my view, you cannot have a situation where a person sets up their own limited company and the travel expense falls foul of the 24-month rule simply because the employer and the employee are in effect one and the same, whereas if he/she takes up temporary workplace employment with an employer then the claim is allowable. (I have had no personal involvement in any similar case, but I did work behind the scenes in one case where HMRC stated that it was not expected that an employer [in this case an umbrella company] would look into the previous employment history of an employee in order to apply the 24-month rule)

Please note this response is not a definitive answer, rather it is my opinion based on the situation you describe. Your circumstances are not covered in the HMRC examples, so my advice is based on my reading of the legislation. For me, the answer as to whether you can claim or not all hinges on the definition of a continuous period and "..over the period the duties of the employment are performed at a particular place ...". "The employment" is singular therefore previous employments do not figure in the calculation, in my opinion. Therefore I believe that there is a strong case to say that the expense is this case is allowable.

The expert was Bob, the retired tax inspector.