HMRC audit going badly

[the oaf]

Apologies for not welcoming myself formally, but I don’t do a lot of internet talk and I’ve only just found this site as I really need some advice as I’m finding myself in a very unpleasant, and possibly life ruining position.

Basically, I set up my limited company in March 2006 and with the exception of three and a half months at the beginning of 2010, have been in full employment; however, I have always been aware of the 24 month rule, and as such have ensured that no contract ran or was even renewed for up to or more than this period. Without naming names, the periods I have spent at various companies are as follows:
Company A – Mar06 to Jun06
Company B – Jun06 to Feb08
Company C – Mar08 to Oct08
Company D – Oct08 to Dec09
Company E – Apr10 to Present

I was under the impression, that as a contractor, as long as no contract was to run for more than 24 months, I could claim expenses, which I have done; however, I have been honest and only claimed for my train tickets, mileage to and from the station, £4 a day for subsistence and an eye test every two years. This does not sound like a lot, but my work is finance based and therefore in central London, and I live in Bournemouth, so the train ticket is quite pricey (close to £600 per month currently) which means that my expenses have averaged about £8,000 a year for the last five years. Before anyone jumps to any conclusions, I am by no means a high earner; that figure is not far off 20% of my gross for the year; however, even by paying this amount for travel, I am (or at least thought I was) still far better off than working locally, as the wages are so poor in Bournemouth.

This situation has ticked along with no problems for 5 years, and I never thought anything was wrong as my accountants never queried my expenses; then at the end of last year, the HMRC decided to audit my personal tax for the 2008/2009 tax year. Firstly they wanted all my receipts and my mileage log for that year, which I provided, then they requested copies of all my contracts for that year, which again I provided; then they requested copies of my contracts to the start of my limited company, which I thought was an odd request, but I also provided. Then about a month or so ago, I received a letter, the gist of which was that even though they agreed all my contracts had been independent, as all the locations had been within “The City of London”, and no significant change had been made to my travel, then the geographical location of “The City of London” was deemed my “permanent” place of work, all my expenses were discounted, and I owed them a further 3 grand.

Now obviously in my time contracting I’ve developed a network of other contractors, both in finance and IT, agencies and accountants, and without exception none of them knew of this clause, including (I’ve inferred from correspondence content) my own accountants. Most in fact said it sounded like (expletive deleted) because you can’t be a permanent employee of a geographical location, it’s just unfortunate that 99.9% of roles in my line of work are going to be based in that area.

I also scoured the HMRC website and rules, but the only mention of this I could find was rule EIM32080 - Travel expenses: travel for necessary attendance: definitions: temporary workplace: limited duration, the 24 month rule:
EIM32080 - Travel expenses: travel for necessary attendance: definitions: temporary workplace: limited duration, the 24 month rule
At that time the examples they sited related either to contracts being extended over the 24 month period, or employees working at various different sites or shops within a set area, but for the same company. I went through the examples diligently and there was not one that cited a complete change in employer along with new terms, rates and role.

However, looking again tonight, it does appear as though the HMRC has made some changes to their site and the following example is my situation to a tee (conveniently):
Travel expenses: travel for necessary attendance: definitions: temporary workplace: example
Now, I’m not infallible and there is a possibility I may have missed it the first time, but I’m fairly confident I would have found this as it’s linked right to the main page.

My accountant’s legal team has told me that the HMRC are clamping down on such claims, especially as when the value is considered as being quite high; the argument they are presenting relies on section 339(7) of the ITEP act 2003, which is being interpreted in a very broad sense. The HMRC are disallowing my claim for travel and subsistence on the grounds that no substansive work was carried out at my home address/the registered office of my limited company. This goes against everything I, and everyone I know has ever been told about contracting.

There are two things that now worry me. Firstly, everyone I know who contracts or has previously contracted are now liable to be clobbered with a bill from the HMRC; and secondly, the overall size of the bill I could face. If I absolutely have to, then I can (begrudgingly) swallow a 3 grand additional payment; however, if all my claims are disallowed, then that could potentially leave my open to a similar bill for each of the other 4 years on my personal tax and a similar amount on my corporation tax for all five years, and I simply don’t have a spare 20 to 30 thousand... not many people do. I’d either have to try and get work abroad and pay it back slowly (or never come back), or go bankrupt.

Does anyone have any advice, or even better has anyone been in a similar situation or know someone who’s been in a similar situation?

[cojak]

I'm afraid I can't help you on the audit side (though I'm sure someone else will). But I am aware of the City of London problem. Any contract location within a few miles of a previous one is going to be problematic and for that reason I rotate my contracts around London/Bristol/Birmingham/Manchester/ Leeds every 24 months.

I realise that this doesn't help but we are aware of this ruling.

[LisaContractorUmbrella]

There have been changes made to the 24 month rule which effectively means that your location has to change 'significantly' to restart the clock. However, 'significantly' isn't defined and is therefore open to interpretation which could be a possible basis for your counter-argument. Would you be able to prove, for instance, that although the locations were not a huge distance apart, the travelling times were very different? If not then I am afraid that there will be very little you can do other than try to mitigate the financial liability - I am not sure when the 'significantly' was added in to the 24 month rule but I think it was only within the last couple of years.

[Craig@Clarity]

Not to increase your blood pressure but rather reduce it slightly hopefully. Based on your information, my initial thoughts are it is likely the permanent workplace began when you started working for Company C onwards since you couldn't predict or you weren't in the city for 24 months under company A and B. This means that £24,000 (£8,000 x 3) of expenses could be disallowed by HMRC meaning they would most likely view that you have had a corporation tax deduction of this amount (assuming you are working through your own limited company). The ballpark figure your company would be looking at in terms of tax owed back to them is 21% corporation tax of £24,000 = £5,040.

They could then take a view that the expenses your claimed through your company is a BIK from Company C onwards, so the class 1A NIC due from your company would roughly be 12.8% of £24,000 = £3,072

The BIK would also create a personal tax liability of either 20% of £24,000 or 40% of £24,000 = £4,800 or £9,600 respectively depending on which tax bracket you fall into.

[Wanderer]

I received a letter, the gist of which was that even though they agreed all my contracts had been independent, as all the locations had been within “The City of London”, and no significant change had been made to my travel, then the geographical location of “The City of London” was deemed my “permanent” place of work, all my expenses were discounted, and I owed them a further 3 grand.

Sorry to hear of your plight. It sounds like you were poorly advised by your accountants, the 24 month or 2 year rule is fairly well known here and discussed reasonably often so I'm surprised that the accountants didn't pick up on it.

Did the 3 grand include penalties or was it just the tax owed?

There isn't much you can do about the expenses which have been claimed but Cojack's suggestion about changing your location is a good one. You will need to make sure you get the timings correct (right number of months working in each location) so you can reset the two year timer.

The other thing to consider is that HMRC mentioned The City of London which is actually a very small geographic area. Did your contracts actually all fall within the square mile or were some outside? It may be worth getting professional advice and see if you have a case to argue against the HMRC.

Good luck and let us know how you get on.

[configman]

Experienced similar in Y2k. I lived in Bristol then but had an 8 month contract in London followed immediately by a 24 month (incl. extensions) in Berkshire. HMRC then tried to claim that the entire south/south-east was my permanent residence but they soon backed away without explanation - I think something called IR35 whatever that is became their priority. It does show how grey the rule is though, and is open to mis-understanding and mis-interpretation.

I'm clutching at straws (and not an expert) here but although you were in London for 2 years plus you may have evidence to still show why it was not a permanent residence. Before the end of each contract I assume you looked for other contracts wherever they were but just got the London ones - have you got evidence of other applications in this time to make HMRC argument wobbly. This evidence could prove uncertainty of London being perm and that it was pointless moving to London as the next contract could be elsewhere. The only permanent place is your home. I think HMRC would cause a stir if they demand all finance workers to move to London - just a thought.

[xoggoth]

As CIT says, you should have no problems for first 2 years up to the point you knew you were going to be there longer. That is quite clear in the rules.

I know from personal experience they make inflated claims but you don't have to accept their figures. This seems to be the way they operate, or did. Just add up everything they think you might possibly owe and expect you do all the work refuting it.

[psychocandy]

I've heard the HMRC claim the City of London to be the same for the 24 month rule. But, claiming the whole of the South East is surely taking it too far ???

As for the OP, I guess it looks worse because even though the location may be slightly different, they'd still be catching the same train from Bournemouth I guess (fair old commute that mind)?

Generally, I work in Wales and Bristol / South West, so I could argue that different gigs were in different countries even !!!! :-)

[Fred Bloggs]

Basically, what Cojak says. I too try my best to ensure that I work in significantly different locations. Longest stay for me in one area has been 23 months for me encompassing two contracts. I think you have an uphill battle on your hands but you should at least be OK for the first two years of your claims I think. Good luck.

[northernladuk]

There has been many discussion on the 24 month rule here and I remember a few long threads particularly on the London thing with everyone having a slightly different take on it spanning the whole spectrum. I remember some guys arguing taking a different Tube line that was 8 stops away was, in their eyes, a signficantly different journey. The OP's is a sad tale but at least puts the tube journey one to bed once and for all.