Contractors' Questions: Would commuting cost me less as a 'Ltd' company?

Contractor’s Question: If I set up as a limited company contractor, would the costs I incur from commuting every day by road or rail to the contracted workplace be fully or partially reimbursable, or just tax deductible?

I’m unclear what ‘tax deductible’ means precisely, or how it would benefit me in practice, but surely being a limited company would make potentially high travel costs to a workplace more affordable than if I was an employee of that workplace?

I ask because the workplace has expressed an interest in taking me on, as an employee or maybe as a 'Ltd' instead.

Expert’s Answer: We’re now seeing this kind of scenario cropping up all the time in the UK, as people are generally more aware that there is more than one way to work. And quite often, the benefits of acting as a limited company outweigh those of being a fully-fledged employee of a firm.

As a limited company contractor, the cost of travelling to and from your working site is 100% tax deductible. This is not possible for a full-time employee who is commuting to work every day.  

However, there are restrictions that contractors acting as a limited company need to be aware of. Their ability to claim expenses against travel into work is very much dependent on the length of time that the contract is due to last. In 1998, the tax authority introduced the ’24 month rule,’ which essentially prohibits claiming main-site subsistence and travel expenses once the contractor has been at a working site, or had the intention to work at the site, for 24 months or more.

Assuming that the 24-month rule is not applicable in this case, the cost of the travel is 100% tax deductible regardless of the means of travel used. For example; train and bus tickets could either be paid directly from the business or paid initially by you, the contractor, and then reimbursed by the limited company. If you, the contractor, would use your own vehicle, then the cost of mileage would be claimable (0.45p for the first 10,000 miles and then 0.25p thereafter). This would be reimbursed to you as an expense through your limited company.

It’s also worth explaining at this juncture what the term ‘tax deductible’ actually implies, as this is something you say that you're unsure about. In a nutshell, these costs reduce the operating profits of your business, and this means that expenses can be offset against the company’s corporation tax, thus reducing its liability.

HM Revenue & Customs likes to keep limited company contractors on their toes, and the tax department is constantly updating the rules as to what people can and cannot claim expenses against. For somebody like you who sounds new to both contracting and contractor expenses, staying on top of HMRC’s updates can be a thankless task, so you should strongly consider instructing a professional accountant to do this for you on an ongoing basis.

The expert was Michael Hough, director at Quantic UK, a specialist in freelancer and contractor accounting.

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Friday 21st November 2014