Contractors' Questions: Who's right about the 24-month rule, me or HMRC?

Contractor’s Question: Having read about the 24-month and 40% rules, I’m surprised my accountant thinks that my accommodation near the client, where I’m working on a 13-month assignment and which is a mega 5-hour drive from my home, is not tax deductible.

Confusing me more is that I asked HMRC and they said the 24-month rule does not apply to the self-employed, only the employed. For the self-employed, HMRC says the contract location is the base of operations from day one. Who’s right; my accountant or HMRC? Or is it neither (as I suspect), meaning the 24-month rule is in play but accommodation is deductible?

Expert’s Answer: From the start, may I say how much I sympathise with your dilemma.  Given the complexity of the rules, determining the deductibility of contractor expenses was never an easy thing to do, and following recent legislative changes, what was difficult before has now been made even harder!

Unfortunately, in the body of your question you have not provided any background to your current employment status. HMRC are correct in their advice to you that the ‘24-month rules’ (which are in fact a collection of Income Taxes legislation, the 24-month rule being a ‘nick name’, rather like ‘IR35’) do only pertain to employees and not to self-employed individuals. 

However, many contractors who operate through their own limited companies (also known as Personal Service Companies) often think of themselves as self-employed. In fact, if you operate through your own limited company, then you are in fact an employee of that company and therefore the 24-month rules do apply to you. On the other hand, if you genuinely operate as a self-employed individual and file your earned income under Schedule D, then the only restrictions that apply to you to claim allowable expenses are that those expenses must be “wholly, exclusively and necessarily” incurred in the performance of your duties.

While there is little doubt when it comes to determining whether an expense has been incurred “wholly” and “necessarily”, when it comes to determining the deductibility of accommodation, the problem comes down to the interpretation of “exclusively”. If, for example, you chose to stay in a 5-star hotel at £300 per night from Monday to Friday, returning to your normal place of residence at the weekend, then HMRC should (subject to my guidance above) allow this expense. On the other hand, if you chose to save some money and short-term rent a room at say £500 per week, then HMRC could argue that this rental had a “duality of purpose,” in that it was available for your personal usage (not just your professional usage) at the weekend, when you were not working. This duality of purpose, at least in HMRC’s eyes, is enough to break the “exclusively” test and they could then disallow this claim.

So you can see that what appears to be a simple question by you, does in fact have quite a complex answer. However, I would have expected your accountant to have enough background knowledge of your particular situation when he advised you (if not, maybe it’s time to consider moving to an accountant who will). As for HMRC, they will have provided you with an answer only to the specific question you asked – bear in mind that you may not have given them all the relevant facts.

If you’re still struggling to get your head around these complex rules and whether you’re in scope, contact me directly through the link below and I will see if I can help you further.

The expert was Barry Roback, a director of the Anderson Group, an accountancy firm specialising in contractors' tax affairs.

Editor's Note: The expert's answer is an updated version of the original.

Tuesday 30th August 2016