The 24 Month Rule in a nutshell

[TheFaQQer]

Why do so many people link the two year rule and IR35? I have many contractors tell me that staying at one place more than two years is bad for IR35.

Because after two years you run the risk of being seen as part and parcel of the organisation.

Was it Dragonfly where the contract started as being outside IR35 and then turned into being inside IR35 merely because everyone took their eye off the ball and started to treat the contractor as an employee? I can't remember the specific reference (I think it was Dragonfly, though), so if I'm wrong someone will correct me I'm sure.

[Jase]

Q: Is Travel and the two year rule a completely different issue to IR35?

A: Yes, it is completely different Legislation. Travel can still be claimed from your ltd company even though you operate inside the IR35 Legislation.

Why do so many people link the two year rule and IR35? I have many contractors tell me that staying at one place more than two years is bad for IR35.

[JRCT]

Best not to make the decision yet then eh?

Indeed. i haven't actually been offered an extension yet. I just wanted to be ready.

Though, clearly if my end client read this and realised what an idiot I am, there would be no extension.

[TheCyclingProgrammer]

As soon as I know it's going to be over 24 months, I just stop putting it through the business completely and I pay it myself.

YourCo can continue paying for it if it makes life easier, just remember it has to go on the P11D and entered into your self-assessment as expense payments - the equivalent tax relief on your SA will be limited to the duration you were there before you knew it would exceed 24 months.

[TheCyclingProgrammer]

Let's say my annual travel expenses are £5k. So far, my ltd has been paying that and has claimed tax relief on it. Meaning no cost to me personally, and effectively a £4k cost to my ltd, rather than £5k (the tax saving bit).

It's only the tax saving bit that is affected by the 24 month rule so I am going to continue to allow my ltd to pay the £5k as a cost of doing business. This means STILL no cost to me personally but the full £5k cost to my ltd.

As my ltd pays me a tax free salary and dividends up to (not into) the higher rate limit, I won't have to take an extra £5k of dividends at the higher rate to cover the £5k cost of travel.

As this is completely work related travel there is no BIK due for me, personally, on this £5k.


Is this the correct approach to take under these circumstances?

You've got this a bit backwards. Tax relief for travel is a personal taxation matter, not a company taxation matter. YourCo can continue paying for your travel and the cost to your company will always be deductible for corporation tax.

All expense payments, unless for things that are exempt from tax (like mileage), are treated as taxable payments to the employee. The employee needs to claim tax relief on these payments for valid business expenses. This is why they need to be reported on a P11D.

Once caught by the 24 month rule, you, as an employee/director can no longer claim tax relief. All payments made from YourCo to you will be tax deductible for YourCo but you will pay income tax on them (and possible NIC, can't remember).

[tractor]

...

Just checked and you are both absolutely right, so thanks for that.

As soon as I know it's going to be over 24 months, I just stop putting it through the business completely and I pay it myself.

Best not to make the decision yet then eh?

[JRCT]

Just checked and you are both absolutely right, so thanks for that.

As soon as I know it's going to be over 24 months, I just stop putting it through the business completely and I pay it myself.

[JRCT]

No, sorry, there will be BiK. That's the whole point of the 24m rule. It's no longer a temporary location so no loner a work expense. The company can pay for it (and claim relief) but it's taxable personally.

The alternative is to take the money by another means, i.e. increased dividends. If that pushes you into high rate band then the same would be the case if it were treated as BiK.

Sure you're not mixing up corporate and personal money here? The tax due is personal to you, since the expenses become a Benefit in Kind and so are treated as salary. If YourCo buys the train ticket, rather than you buying it yourself and expensing it, you are still liable for income tax on its cost.

Ok, thanks. I'll go back to my acountant and double check with them. I specifically asked this and was told there would be no BIK.

[malvolio]

Sure you're not mixing up corporate and personal money here? The tax due is personal to you, since the expenses become a Benefit in Kind and so are treated as salary. If YourCo buys the train ticket, rather than you buying it yourself and expensing it, you are still liable for income tax on its cost.

[Contreras]

As my ltd pays me a tax free salary and dividends up to (not into) the higher rate limit, I won't have to take an extra £5k of dividends at the higher rate to cover the £5k cost of travel.

As this is completely work related travel there is no BIK due for me, personally, on this £5k.

No, sorry, there will be BiK. That's the whole point of the 24m rule. It's no longer a temporary location so no loner a work expense. The company can pay for it (and claim relief) but it's taxable personally.

The alternative is to take the money by another means, i.e. increased dividends. If that pushes you into high rate band then the same would be the case if it were treated as BiK.