The 24 Month Rule in a nutshell

[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).

[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.

[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.

[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.

[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.

[LisaContractorUmbrella]

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.

Not sure if it started off outside but I believe that was the one with the guy working at the AA who had ROS, provided own tools etc but the Judge considered that he had 'integrated' into the workforce and therefore was a disguised employee - that's more likely to happen I suppose the longer you work somewhere

[malvolio]

Not sure if it started off outside but I believe that was the one with the guy working at the AA who had ROS, provided own tools etc but the Judge considered that he had 'integrated' into the workforce and therefore was a disguised employee - that's more likely to happen I suppose the longer you work somewhere

More to do with not having specific deliverables and/services in his contract schedule.

[TheFaQQer]

It was JLJ that I was thinking of, not Dragonfly - outside for the first three years, inside for the rest of the contract.

Time itself isn't important - it's the implication that over time people will see you as an employee rather than a contractor.

[Goatfell]

A rhetorical situation:

Nigel lives in Nottingham and has been employed in Derby for 12 years by Acme Services Ltd in a number of roles, slowly moving up the management ladder. The company decided to establish a new division in Stratford and appoints Nigel to set it up. As this is a temporaray assignment the company leases a flat in Stratford for him to use and pays the travelling expenses he occurs in driving to and from his Nottingham home to the Stratford office. After nearly two years the new division is a great success and Acme rewards Nigel with a corner office back in Derby.

Six weeks later he's approached by a competitor of Acme who want him to set up a new division that they're starting, as Nigel is bored being back on the corporate treadmill and he's being offered a very genourous package, he accepts. After induction at Whizzo's HQ in Manchester he's off to the new start up in Stratford, where Whizzo have leased a flat for him and are paying the travelling expenses he occurs in driving to and from his Nottingham home to the Stratford office.

Seems like a cut and dried case of falling within the 24-month rule, but what would the mechanism be for reporting it? Nigel's never heard of it, as far as Acme's payroll department is concerned the deployment was for less than 24 months, Whizzo's payroll department have no idea about his previous expenses at Acme. Are Hector's systems clever enough to deduce a connection from the P11Ds issued by different employers - unless Acme or Whizzo had a dispensation?

I'd be interested in your views, particularly the professionals.

[TheCyclingProgrammer]

If either employer has a dispensation, then the chance of HMRC knowing anything about this are slim, but not impossible - it would probably require an enquiry into the employee's own tax affairs (as it is the employee who must claim tax relief if no dispensation is in place) and for HMRC to see that the travel costs have all been for substantially the same journey.

If both have a dispensation and therefore the employee does not have to claim any tax relief (but should still, technically, be keeping receipts) the chances of HMRC ever knowing are reduced even further IMO.

If neither have a dispensation, then presumably the employee must be making claims on either a P87 or more likely for that amount of travel costs, a self assessment. Again, it would only likely come up if HMRC conducted an enquiry because there isn't enough information on the return to see that travel expense claims are for multiple workplaces.

Hypothetically speaking, if I was the employee, and both employers had a dispensation, I'd likely keep quiet.

If somebody got caught and they were genuinely ignorant, I'd expect HMRC to be lenient on penalties but they'd still want the unpaid tax + interest.