Dear Contractor Doctor
I am an oil and gas contractor normally living and working in Aberdeen and trading via a limited company that I co-own with my wife. I have recently won a new six-month contract with a client based in Norfolk.
It just so happens that we have a holiday home in Suffolk, which we own, where I intend to live during the week when working at my client’s Norfolk base. If it were not for the holiday home, I’d be incurring accommodation expenses for staying in a hotel or bed and breakfast.
Can I claim rent expenses for using a holiday home I own?
Contractor Doctor says:
“A holiday home is treated the same as a contractor’s principal residence, so the opportunities for claiming expenses when using it for business accommodation are limited,” explains James Abbott, tax partner at contractor accountant Abbott Moore.
“The contractor Chris could consider changing the property’s use to being wholly for business, but that may have capital gains tax implications, especially if he has implemented a tax planning strategy requiring the family’s holiday home to be its principal private residence.”
Expenses that can be claimed for business use
“Contractors using a private property they own for business purposes have two options,” continues Abbott. “They can either claim HMRC’s standard allowance of £4 per week, or they can determine whether the variable costs increase as a result of business use and claim the increase.”
Abbott confirms that HMRC’s core principal of marginal cost applies. This means that HMRC will only accept as legitimate expenses those additional costs incurred as a direct result of business use.
“Realistically, if Chris is only using the holiday home for overnight accommodation, and perhaps the occasional hour of admin work away from the client’s site, he is only likely to see a small increase in utility bills. It is debatable whether that is worth claiming as an expense.”
Chris could also look at setting up a rental license between him and his limited company, claim a rent for the company’s use of the property and then claim the running expenses on an apportioned, rather than marginal, basis against the rent received.
Given that any rent, after deductible expenses, will be taxed on him personally, Chris would need to look at whether it is worth the trouble. As with most tax issues involving contractors, Chris would need to look at both the company’s and his individual tax positions.
‘Opportunity costs’ cannot be claimed
Abbott highlights another issue; that of claiming for ‘opportunity costs’: “In this case, just because the contractor would have been incurring legitimate accommodation expenses if he was not staying in the holiday home is irrelevant.
“HMRC will only allow contractors to claim actual expenses incurred. So it would be perfectly reasonable for Chris to stay in a hotel, or even rent a property local to his client where he lives during the week, and claim the costs as expenses and a corporation tax deduction for his limited company.”
But a contractor not actually incurring any additional costs cannot claim for them; HMRC won’t allow contractors to claim for ‘opportunity costs’.
Beware of Principal Private Residence (PPR) rules
As Abbott has identified above, another option open to Chris would be to switch the holiday home from a private residence to a being business premises. Although this would allow the contractor to claim the expenses of running the former holiday home as business premises, it may cause other tax complications in the form of capital gains tax.
Abbott explains: “Contractors commonly make use of ‘principal private residence’ election, or PPR, to manage potential capital gains tax liabilities on a second home. Everyone is allowed a single principal residence that can be bought and sold without attracting capital gains tax, which a home-owning contractor must specify.
Contractors commonly make use of 'principal private residence' election, or PPR, to manage potential capital gains tax liabilities on a second home
James Abbott, Abbott Moore
“Contractors with second homes can swop their PPR from the main family home to their second home for the duration of a week and this election can be backdated for up to two years. This means in any period, both properties have enjoyed PPR status at some point – the main home for two years less one week, and the second home for a week. The benefit of this strategy is that each property becomes tax exempt for three years.”
The upshot of upsetting any PPR arrangements is that if the property is redesignated as wholly business property, although the contractor may gain exemptions for the running costs, they may face a hefty capital gains tax bill when they come to sell the property.
Abbott concludes: “The devil, as always, is in the detail. Contractors considering changing the tax arrangements of their second property would be wise to check with their accountant first.”