Contractor covid tests - are they tax-deductible when required from Monday?

From Monday, February 15th 2021, all passengers arriving in the UK – and that includes UK contractors returning from essential travel -- must both take and pay for their own PCR test, once they touch down in the country,

Or so health secretary Matt Hancock is reportedly set to say in a House of Commons statement, with potential cost and tax implications for contractors, writes Kevin Austin, managing director of Access Financial.

Tax treatment of PCRs

Required to be taken on days two and eight after travellers’ entry into the UK, the current cost of the test is a not insignificant £100. And two tests are required. So, for independent contractors, are these covid-19 tests coming in at around £200 going to be tax-deductible?

Our current reading that it is very likely that under current HMRC expenses rules, employees who have to pay for the Polymerase Chain Reaction (PCR) tests themselves might not be able to claim the cost against their tax liability. The reason is that the cost is not 'wholly, necessarily and exclusively' for their employment which is the key HMRC test for tax deductibility.

Ask your employer

So if you’re an employee of, say, a large IT consultancy, you would be well-advised to ask your employer to meet these costs, which should be an allowable expense of the employer’s trade and off-settable against their corporation tax liability. We doubt that HMRC will assess these as a ‘benefit-in-kind’ and taxable on the employee.

But if you’re self-employed, good news -- you should be able to deduct the expense of the PCR tests against your tax bill, using the argument that the £200 is incurred ‘wholly and necessarily’ for your trade.

Even inside IR35 contractors can claim

Those individuals working through their limited company (or Personal Service Company) should also be able to deduct the PCR tests' expense against their tax bill, even if they are inside IR35.

The following two provisions allow for this. 

1. The IR35 legislation’s 5% rule (also known as IR35’s Administration Allowance)

Although this allowance has been removed for limited company contractors in the public sector, it can still currently be used by private sector-supplying limited companies, inside IR35, to cover the cost of running a limited company. It can cover accountancy fees, IT training, stationery, telephony costs, broadband charges, and computer equipment. 

After April 6th 2021, the five per cent allowance will continue to cover such PSCs with ‘inside’ IR35 status, albeit only for those of them with an engager categorised as a “small company.”

Remember, if you’re providing services to the private sector, and IR35 only partly catches your work, the deemed payment calculation (which entitles you to the 5% allowance) applies just to the proportion of your annual turnover related to IR35-caught engagements.

Additionally, limited companies caught by IR35  -- as well as limited companies not caught by IR35 -- can also claim for expenses under:

2. Section 336 of the Income Tax (Earnings and Pensions) Act 2003 (previously covered by s.198 of the ICTA), which includes: 

  • Travelling expenses for business purposes. 
  • Subsistence expenses, such as the cost of accommodation and meals when working away from your usual workplace. 
  • Payments into an executive pension scheme. 
  • The cost of business insurance cover, such as professional indemnity insurance. 
  • Professional subscriptions. 

Over to the taxman

Hopefully, HMRC will rapidly update its page on the tax treatment of PCR tests and its page on work from home expenses amid the coronavirus. Workers need this clarity -- particularly limited company contractors who, as the most flexible workers, are more likely than others to be travelling in and out of the UK and therefore will be facing two lots of PCRs costs sooner rather than later.  

Profile picture for user Kevin Austin

Written by Kevin Austin

Kevin is a Fellow of the Institute of Chartered Accountants in England and Wales, a Fellow of the Association of Chartered Certified Accountants, a Fellow of the Association of International Accountants and a Fellow of the Chartered Management Institute.

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