Contractors taking genuine business trips can legitimately tag a holiday onto their trip and still claim expenses from their contractor limited company or umbrella company, explains James Abbott of contractor accountant Baker Watkin. “For once, HMRC’s approach of allowing employees only marginal expenses works in a contractor’s favour.”
A contractor could even fit in some client entertainment or take their family on a holiday, as long as the original trip is essential for the performance of their work duties and the contractor also sticks to HMRC’s normal rules regarding business expenses.
Contractors are employees and claim expenses on a marginal basis
“If a contractor normally based in London was heading off to Edinburgh to spend a Thursday and Friday at their client’s office, and then added an extra day to maybe catch a rugby match on the Saturday, logic suggests that you’d add all the costs and, on a pro rata basis claim two thirds of the travel, accommodation and subsistence costs for business and a third for personal expenses,” says Abbott.
However, he notes, because contractors are employees of their limited company or umbrella company, they can only claim the marginal cost of the expenses they incur, ie costs that would not have otherwise been incurred unless the contractor was performing business duties. Normally this works against contractors, but in this situation it works in their favour.
“A contractor would be incurring the cost of the flight and two days of hotel bills and subsistence for business purposes, so these expenses are 100% allowable,” says Abbott. “The contractor would only have to reimburse their company for the additional hotel and subsistence costs incurred on day three.
“They could even fit in some entertainment and take their client to the game in Edinburgh on the Saturday courtesy of his company. And although these costs would not be allowable against a contractor’s limited company corporation tax, higher rate taxpayers would effectively gain 20% income tax relief for these expenses.”
Contractors’ spouses may also qualify for fully recoverable expenses
If there is a genuine reason for a spouse to accompany a contractor on a business trip, for example if the spouse performs legitimate business duties that are needed on the trip, then it might also be possible to claim their travel, accommodation and subsistence expenses in full.
Abbott explains: “A contractor could be visiting clients in Spain, and the contractor’s spouse could be a fluent Spanish speaker and thus fulfil the role of an interpreter. Alternatively, the client may be hosting a series of hospitality events and the spouse acts in the capacity of event organiser, making all the relevant arrangements.”
If the spouse has no business reason to join the contractor, then once again marginal costs come into play and any additional travel, accommodation and subsistence costs incurred by the spouse cannot be legitimately claimed and must be reimbursed to the contractor’s company.
On the family front, if the driver were taking the car on the journey to Edinburgh and the hotel did not charge extra for a family room, then the contractor could take both spouse and children on the trip and still claim 100% of travel and accommodation expenses.
Business reasons must be the principal reason for a trip
“Contractors must also be able to prove that business is the principal reason for a trip and that it’s not the other way round. This is particularly true of conferences and training events, which must be directly relevant. And,” warns Abbott, contractors should certainly not invent a business reason just so they can claim the expenses of a holiday, as trips undertaken for tenuous reasons will be challenged by HMRC.
Contractors must be able to prove that business is the principal reason for a trip and that it's not the other way round. This is particularly true of conferences and training events, which must be directly relevant
James Abbott, Baker Watkin
“Normal expenses disciplines apply,” he adds. “Contractors should keep all receipts and note their justification for the trip. A record should be made, and filed in the appropriate year’s records, of who went, why and the basis of any calculations, such as the split of costs between business and personal use.”
James Abbott heads up Baker Watkin's tax department and often speaks on freelancer / contractor tax matters. He has his own portfolio of contractor clients.
Baker Watkin are PCG Accredited Accountants and UK200 Group members based in Hertfordshire.
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Abbott concludes: “Contractors should only claim for expenses incurred whilst performing the duties of their employment. This is especially true of business trips that contain an element of personal time, as HMRC will be on the lookout for any attempts by a contractor to claim more than they are entitled to.”
Published: Wednesday, June 15, 2011
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