Limited company contractors travelling on behalf of their clients by air face the twin challenges of navigating HMRC’s opaque expenses rules and IR35 tax legislation. And when the client insists on managing booking and payment of flights, the whole process may become further complicated on both fronts.
“Ideally contractors should book and pay for business travel required on behalf of a client using their own business and company credit card, and then recharge the client,” says James Abbott, tax partner at contractor accountant Abbott Moore.
But he acknowledges this isn’t always possible. “If the client books the trip, and there are restrictions on when or how the contractor can travel, the IR35 status of the contractor could be called into question if HMRC decides to investigate.”
How business travel should be managed
According to Abbott, from both a tax and IR35 perspective, contractors should book and pay for flights and then recharge the client for the cost, perhaps with a time charge or overhead on the travel cost to cover the time spent arranging the travel, with VAT at the prevailing rate added on top.
As long as the contractor can show a paper trail that they tried to negotiate handling the booking and payment process, but there was a sound commercial reason that the client did so, there should be no IR35 concerns
James Abbott, Abbott Moore
“This would be the normal way most contractor and other businesses would operate,” he says. “Other costs included in the trip, such as subsistence and accommodation, would also usually be incurred by the contractor within HMRC’s expenses rules and then recharged to the client, along with the flight costs.”
A contractor could also tag on a holiday to the end of the trip, as long as they covered the costs of the extra accommodation and sustenance themselves, and did not try to claim them back either form their own company or from the client.
Justifying the client booking and paying for travel directly
“Contractors may find that the client insists on booking the flights,” continues Abbott. “Whilst that single fact won’t by itself put a contractor inside IR35 or cause expenses issues, it does imply that there is a level of control by the client. In these circumstances, contractors should be able to demonstrate a business reason why the client booked and paid.”
Typical business reasons could be that the client’s purchasing power can secure cheaper flights or its travel agency function, whether internal or outsourced, would charge less for managing the booking process than the contractor.
“As long as the contractor can show a paper trail that they tried to negotiate handling the booking and payment process, but there was a sound commercial reason that the client did so, there should be no IR35 concerns,” adds Abbott.
IR35 weather warning ahead
But Abbott warns contractors against falling into some classic IR35 traps: “A contractor should not accept a company credit card provided by their client; they should always pay for expenses directly using personal cash or cards, or preferably their contractor limited company resources.
“They should also not be bound by policies that apply to client employees, for example restrictions on the class of flight, subsistence allowances or travel times. Contractors should negotiate their own basis for claiming expenses and recharging travel time.”
In practice, this might mean that what contractors can charge to the client and what they actually spend are different. Abbott confirms this is acceptable, because what the contractor charges the client, for example the cost of an economy flight, and what they actually spend, say, by preferring to fly business, are separate issues.
He also adds that contractors should also be clear about the cost of time actually spent travelling: “Some contractors charge extra, others build it into their fee if they know up-front how much travel will be required. Whichever is chosen, it should be documented.”
VAT flat rate scheme
Another common pitfall identified by Abbott is contractors using the VAT flat rate scheme who suddenly find themselves travelling extensively on behalf of clients. This potentially has two implications:
- The sudden increase in travel results results in a corresponding increase in turnover that lifts higher-earning contractors above scheme’s turnover threshold
- Contractors travelling extensively in the UK can potentially lose money on flat rate transactions, whereas contractors flying and/or travelling abroad and staying in overseas hotels may actually ‘make’ money.
There is little a contractor can do about exceeding the flat rate turnover limit. On the second implication, Abbott provides an example:
- If a contractor pays a UK hotel bill of £100 including VAT and charges the client £120, the contractor’s limited company pays out £120 and receives £120, so there is no profit. But there is an increase in turnover on which there is a flat rate scheme VAT charge of 14-14.5%, which represents a 14-14.5% loss
- If a contractor visits Paris on behalf of the client and the flight costs £100, the contractor will bill the client £100 plus VAT, and then pay HMRC 14-14.5% of that £120 additional turnover, leaving a 5.5-6% surplus.
Abbott concludes: “Contractors who distance themselves from client travel and expenses policies aimed at employees are likely to steer clear of IR35 issues; and by following HMRC’s limited company expenses rules, they will also avoid tax concerns.”