Dear Contractor Doctor,
I am a financial consultant and I have been working for the same client for over two years, trading and invoicing through my own contractor limited company. I have always claimed expenses, including mileage and overnight accommodation, from my limited company, until recently when I reached 24 months based in the same location.
Although I originally invoiced for a flat day rate, some months ago I renegotiated my contract so I could also claim my expenses from my client, before the 24-month expenses rule kicked in. Since then I’ve not reimbursed myself for expenses, but have continued to invoice my client for them.
Can I charge my client expenses even after the 24-month rule takes affect?
Thanks
Edward
Contractor Doctor says:
“The short answer is ‘yes’. Edward can continue to charge his client for genuine expenses once the 24-month expenses rule takes effect, but he can no longer personally claim expenses from his contractor limited company,” explains James Abbott, owner and head of tax at contractor accountant Abbott Moore LLP.
“In this scenario, the contractor must divorce what he is charging his client from what he personally claims from his limited company, as they are two separate issues,” continues Abbott. “There is no requirement that invoiced expenses should match personal expenses claims, as long as the personal expenses are claimed according to HMRC’s expenses rules and have been incurred wholly for business purposes.”
Invoicing clients for expenses subject to negotiation, not HMRC rules
According to Abbott, contractors can charge whatever they have negotiated with their clients and, unless a contractor is making purchases as an agent of their client, there are no requirements or rules from HMRC dictating what they can or can’t put in an invoice.
“The additional income that Edward is generating by charging his client expenses will simply become extra profit in the company,” says Abbott. “However, the extra profit will attract a corporation tax charge, because there are no corresponding costs being claimed by the contractor to offset tax.”
There is no requirement that invoiced expenses should match personal expenses claims
James Abbott, Abbott Moore LLP
The only rules that might affect the way a contractor invoices their client for expenses are when a contractor is making purchases as an agent of their client. In this case, these costs are classed as ‘disbursements’. HMRC’s rules on disbursements say that this type of cost does not attract VAT, and VAT cannot be reclaimed.
However, Abbott notes that it would be unusual for a contractor to be acting as agent for their client, therefore any recharged expenses would normally attract VAT on the contractor’s sales invoice.
The 24-month rule means expenses invoiced can’t be claimed personally
As Abbott explains, as soon as the 24-month rule takes effect, a contractor cannot claim expenses: “Although he or she can continue to invoice a client for expenses once the 24-month rule takes effect, the contractor cannot subsequently claim these expenses from their limited company.”
Plus, warns Abbott, the 24-month rule does not simply come into effect after two years working on the same site: “As soon as a contractor has the expectation of working at the same location for more than 24 months, then they should cease to claim expenses. For example, if a contractor secured a 12-month extension to their original 18-month contract 17 months into the contract, they should stop claiming expenses as soon as that extension is signed, and not when 24 months has passed.”
In the event that a contractor’s limited company pays for expenses, for example if the contractor pays for accommodation and subsistence with a company credit card after the 24-month rule has taken effect, then the contractor will incur a benefit in kind (BIK) charge and become liable for income tax and National Insurance Contributions (NICs).
Abbott concludes: “Contractors unsure of whether the 24-month rule applies to their current contract should seek professional advice from their accountant.”
Good luck with your contracting!
Contractor Doctor