The 24-month rule

The 24-month rule for travel and subsistence

‘Travel and subsistence’ refers to the expenses claimed in relation to travel costs such as train tickets, and other expenses relating to food or accommodation. These expenses cannot be claimed where the 24-month rule applies, or if you are operating inside IR35.

The 24-month rule does not have a bearing on your IR35 status, however HMRC can claim these expenses back from you in the event of an IR35 investigation which results in liabilities due.

What is a temporary workplace?

A temporary workplace is one that is attended for a limited duration or for a temporary purpose. Even if the workplace falls within this description, the facts should still be looked at to see if the temporary workplace should be considered a permanent workplace.

A place cannot be a temporary workplace if the employee’s attendance there is during a ‘period of continuous work’ at the place which lasts (or is likely to last) for more than 24 months.

This means a period over which, looking at the whole period and considering all the duties of the employment, the duties fall to be performed to a significant extent at that place. HMRC regard duties as performed to a significant extent at a place if the employee spends 40% or more of their working time there.

The modification rule

If a contractor with a Personal Service Company (PSC) has a client for 6 months at a particular location (e.g. canary wharf), then ends that contract and begins a new contract with a new client (the two contracts are not connected in any way) for 20 months, they could not claim for travel and subsistence on the new contract if it’s at the same location (also canary wharf) as the previous contract. For tax purposes, HMRC will therefore start the 24-month rule from the date they started at the location, rather than for each individual contract with a new client.  This is called the ‘modification rule’.

If there is no significant effect on the distance travelled, direction, time or cost, HMRC ultimately treats the two workplaces as one to prevent abuse of the travel expense rules.

A few things to bear in mind:

• If a contractor has been incorrectly claiming travel and subsistence, HMRC will reclassify the amounts as income, and the contractor will need to pay tax on it (estimated at approximately 46%).
  
  

• If there is an IR35 enquiry and a contractor is found to be caught, HMRC will demand any travel and subsistence liability in addition to the standard IR35 liabilities.
  
  

• There is a potential debt transfer to employment agencies. If someone in the contractual chain (i.e. an agency) has produced a ‘false document’ (i.e. a contract) which causes a contractor to incorrectly claim travel and subsistence expenses, the liabilities could be passed to the agency.
  
  

• Does this affect my IR35 status?No. This is an entirely different piece of legislation and therefore if you are working compliantly with regards to IR35 this will not change your status.

The 24-Month rule

The “24-month rule” is about who CANNOT claim for this tax relief on travel and subsistence.  For the 24-month rule to apply, there are two parts to the test, both of which must be met:

• The employee must have spent or be likely to spend more than 40% of their working time at a workplace, AND;
• They must attend it or be likely to attend it over a period lasting more than 24 months.
  
  

If both legs of the above test are met, then HMRC will consider that workplace a permanent workplace rather than a temporary workplace, and as a result the contractor will not be able to claim for relief on their travel and subsistence costs.

It is important for contractors to note that from the moment the contractor is aware* that a particular assignment will last longer than 24 months, they may no longer claim for this relief.  Therefore, if you know when you agree to an assignment that it will be go on for 24 months or more, then you cannot claim for this relief at all for this assignment. 

It is also worth noting that the 24 months is regarding overall passage of time, rather than the actual duration spent working for a client.  For example, if you start work for client A on 1st January 2018 after signing a 6-month contract with them, then leave to work for other clients for 20 months and return to work for client A again on another 6 month contract, you can no longer claim for travel and subsistence on your new 6 month contract, as 24 months of time has passed (the 1st of January 2020), rather than how many actual months of work you’ve worked for that client.  

*Note that this is from when you are aware that it will go on for longer than 24 months, rather than from when it is past 24 months.