What is the 24 Month Rule for Contractor Expenses?
The 24 month rule for contractor expenses is a law that allows contractors to receive tax relief on travel expenses should you be required to travel from your home to a temporary working location for a period of 24 months (two years) or less.
If you qualify for such relief it will be paid to you, tax free, directly by your employer. Under the law, travel expenses refer to all reasonable costs that are incurred as a direct result of you having to travel from your home (permanent residence) to your temporary working location.
The Rule Defined
The 24 month rule for contractor travel expenses only applies towards the first 24 months of you being asked to work from a temporary working location if the contract is expected to last for no more than 24 months.
If the contract signals a permanent move, or the move is to last for more than 24 months, no relief will be available for any period. If, however, halfway through a shorter contract your temporary location becomes permanent, or the contract is extended so the total time at your temporary location will exceed 24 months, relief is no longer available from that point on, but relief claimed up until that point may be kept.
Similarly, if you’re asked to work full-time from a temporary location for longer than 24 months, but several (or many) months into your contract at this location your time there is shortened to less than 24 months, you’ll be able to claim relief on the remaining months you have at your temporary location, but you won’t receive relief for the months up to that point, as at that time your contract was intended to be longer than the two year threshold.
What is a Temporary Working Location?
A temporary working location, for the purpose of the 24 month rule, is any location that you aren’t expected to be at (and ultimately aren’t at) for longer than two years.
You should note, however, that if your temporary working location is close enough to your permanent work location that it doesn’t prompt a dramatic change in the journey you take or the cost incurred to get there, with your journey from home remaining largely the same, you won’t be able to claim relief, regardless of how short your temporary working contract is.
Qualifying Exceptions
There are, of course, exceptions to the rule.
If you’re required to work one day a week from a temporary location for a period longer than 24 months you’ll still be able to claim relief for your weekly journeys to your temporary working location because you won’t be spending more than 40 percent of your working time in this temporary location (you’ll be spending just 20 percent, in this example).
If you’re in your job for less than two years, or you’re moved to a new permanent working location, you cannot claim relief as at every stage your working location is considered to be permanent.
How to Take Advantage of the 24 Month Rule for Contractor Expenses
Hiring an accountant to take care of (and organise) your contractor expenses is a necessary business investment if you wish to spend less time worrying about what you’re owed, and more time focusing on your work.
To speak with a professional accountant to discuss the the process of claiming for contractor expenses, or for any other questions, contact us today on 020 8780 2349 or get in touch with us via our contact page to arrange a complimentary, no-obligation meeting.
Three Advantages of Operating as a Sole Trader
If you’re a small (or micro) business owner who plans on keeping things this way for the foreseeable future, there’s a good chance that setting up as a sole trader will be in your best interest going forward.
When you operate as a sole trader there are a large number of advantages that make it an ideal option for smaller businesses, both when it comes to setting up your business and registering with HM Revenue and Customs (HMRC), and once you’ve been trading below a certain threshold for a number of years.
Three of the most significant advantages of operating as a Sole Trader are:
Complete Control
When you’re a sole trader you have complete control over the running of your business, both in terms of your daily workload and the strategic decision making that takes place to determine the direction and (potential) growth strategy of your business.
It’s a common misconception that when you operate as a sole trader you can’t take on staff members. This isn’t true; though you’re the only entity (person or company) that can have a stake in your business, you can take on staff to help you complete your work. Of course, once you take on more than a couple of staff members you may find that incorporating into a Limited Company (Ltd) is a more tax-efficient alternative for your business.
Less Paperwork
Sole traders have to complete far less paperwork than those who run (and are thus director of) a Limited Company. As a sole trader you have no annual accounts to prepare, as your income and expenses are simply entered into an annual Self-Assessment tax return, where you’ll be required to pay Income Tax and National Insurance Contributions (NICs).
If you’ve not done so already you should consider hiring an accountant as soon as possible, as they’ll be able to walk you through the process of registering your business and applying for Self-Assessment in no time, leaving you free to work on making your business a success.
Easy Access to Your Income
One rarely spoken of advantage of operating as a sole trader rather than as a Limited Company is the fact that you have easy access to the revenue you make. Whether it’s paid into a business bank account or your personal account, you can extract this income with ease.
Directors of Limited Companies can only receive the income from their business as a salary, dividend, or loan once your company pays Corporation Tax on it, as the profits your company make are technically owned by your company, not you, a process which slows down your ability to access your income.
Small and Medium-Sized Business (SME) Accountants
There are, of course, several disadvantages of operating as a sole trader compared to operating as a Limited company, many of which we discussed in our recent article on whether you should operate as a sole trader or Limited Company.
To speak with a professional, experienced accountant to discuss whether the advantages of being a sole trader stack up for your business, contact us today on 020 8780 2349 or get in touch with us via our contact page to arrange a complimentary, no-obligation meeting.
Tax Tips and News for August 2015
This issue … Tax-free Childcare; Rent a Room; Help to Buy ISAs; Employment Allowance; August Questions and Answers; August Key Tax Dates
Tax-free Childcare
Tax-free childcare is part of the government's long-term plan to support working families and will provide up to 1.8m families across the UK with up to £2,000 of childcare support per year, per child, via a new online system. It was originally planned that the scheme would launch in Autumn 2015, but, as a result of a direct legal challenge from a small group of childcare voucher providers, development of the scheme was suspended. However, the Supreme Court has recently ruled that government proposals for delivering tax-free childcare are lawful, which means that the scheme can go ahead and is now expected to launch in 2017.
Here are some of the key points of the scheme:
- the scheme will be available for children up to the age of 12, and for children with disabilities up to the age of 17
- to qualify for tax-free childcare, parents will have to be in work, earning just over an average of £50 a week and not more than £150,000 per year. Unlike the current rules for employer-supported childcare, eligibility for tax-free childcare is not dependant on the employer offering the scheme
- self-employed parents will be able to qualify for tax-free childcare. For newly self-employed parents, there will be a 'start-up' period during which there will be no minimum income level requirement
- the scheme will be available to parents on paid sick leave and paid and unpaid statutory maternity, paternity and adoption leave
Anyone wishing to use the scheme will need to open an online account via the government website (www.GOV.uk) and pay in money to the account to cover the cost of childcare with a registered provider.
The government will top up accounts with 20% of childcare costs, up to a total of £10,000 - the equivalent of up to £2,000 support per child per year (or £4,000 for disabled children). So, for every 80p invested, the government will top up with a 20p contribution.
HMRC will re-confirm a claimant's circumstances every three months via a simple online process.
Where circumstances change, and the parent no longer wishes to pay into the account, it will be possible to simply withdraw any funds that have built up. However, where funds that have already attracted tax relief are withdrawn, the government will also withdraw its corresponding contribution.
There are no particular rules regarding when and how much can be saved in the new accounts. The scheme is designed to give as much flexibility as possible regarding savings. This means that parents can build up a balance in their account to use at times when they need more childcare than usual, for example, over the summer holidays.
Rent a Room
In the Summer Budget 2015, the government announced that the level of rent-a-room relief will be increased from the current level of £4,250 to £7,500 from April 2016. This means that from 6 April 2016, an individual will be able to receive up to £7,500 tax-free income from renting out a room or rooms in their only or main residential property. The relief also covers bed and breakfast receipts as long as the rooms are in the landlord's main residence.
To qualify under the rent-a-room scheme, the accommodation has to be furnished and a lodger can occupy a single room or an entire floor of the house. However, the scheme doesn't apply if the house is converted into separate flats that are rented out. Nor does the scheme apply to let unfurnished accommodation in the individual's home.
The rent-a-room tax break does not apply where part of a home is let as an office or other business premises. The relief only covers the circumstance where payments are made for the use of living accommodation.
If additional services are provided (cleaning and laundry etc.), the payments must be added to the rent to work out the total receipts. If income exceeds £4,250 a year in total, a liability to tax will arise, even if the rent is less than that.
There are two options if the individual is receiving more than the annual limit a year:
- the first £4,250 is counted as the tax-free allowance and income tax is paid on the remaining income
- renting the room is treated as a normal rental business, working out a profit and loss account using the normal income and expenditure rule
In most cases, the first option will be more advantageous.
The principal point to bear in mind is that those using the rent-a-room scheme cannot claim any expenses relating to the letting (e.g. insurance, repairs, heating).
To work out whether it is preferable to join the scheme or declare all of the letting income and claiming expenses via self-assessment, the following methods of calculation need to be compared:
- Method A: paying tax on the profit they make from letting worked out in the normal way for a rental business (i.e. rents received less expenses).
Method B: paying tax on the gross amount of their receipts (including receipts for any related services they provide) less the £4,250 exemption limit.
Method A applies automatically unless the taxpayer tells their tax office within the time limit that they want method B.
Once a taxpayer has elected for method B, it continues to apply in the future until they tell HMRC they want method A. The taxpayer may want to switch methods where the taxable profit is less under method A, or where expenses are more than the rents (so there is a loss).
The individual has up to one year after the end of the tax year when their income from lodgers went over £4,250 to decide the best option to take, so it is worth taking a bit of time to work out which route produces the lowest tax bill, we can help you with this.
Help to Buy ISAs
The new help-to-buy ISA, which is expected to be available from Autumn 2015, will enable first-time buyers to save up to £200 a month towards their first home. Investors will receive £50 from the government for every £200 saved, up to a maximum of £3,000. This means that the maximum that can be saved in a help-to-buy ISA is £12,000. The government bonus is added to this amount, so total savings towards the property purchase can be up to £15,000.
Accounts will be limited to one per person rather than one per home, which means that those buying together can both receive a government bonus. A couple will be entitled to hold an ISA each, meaning that a total of £24,000 could be built up across two accounts. With the addition of the government bonus, a total of £30,000 can be built up by a couple under the scheme.
An initial deposit of £1,000 may be made into the account, in addition to regular monthly savings limits. This initial deposit also qualifies for the 25% boost from the government.
The minimum bonus payable by the government will be £400 and the maximum £3,000 per person.
The bonus can be claimed once savings have reached the minimum amount of £1,600. Under the scheme it will take investors just over four and a half years to qualify for maximum bonus of £3,000, if desired.
Help-to-buy ISAs will be available to individuals aged 16 and over. The bonus will only be available to first-time buyers purchasing UK properties.
New accounts will be available for four years, but once opened, there will be no limit on how long an account can be held.
The bonus will be paid when the property is purchased. It will be available on home purchases of up to £450,000 in London and up to £250,000 outside London.
There are certain restrictions under the new scheme, including:
- help-to-buy ISAs cannot be used if the property is to be rented out;
- purchases of overseas property do not qualify under the scheme;
- only one help-to-buy ISA may be held by an individual; and
- investors cannot open a help-to-buy ISA and a normal cash ISA in the same tax year.
Employment Allowance
The Summer Budget 2015 contained two announcements affecting the employment allowance (EA).
Broadly, the EA potentially cuts every company's NIC payments by allowing businesses and charities to offset up to £2,000 (2015-16) against their employer (secondary) PAYE NIC liabilities.
From April 2016, eligible employers will be able to reduce their employer Class 1 NICs liability by up to £3,000 per tax year, instead of the current £2,000.
Secondary Class 1 NICs are 'excluded liabilities', and therefore do not qualify for EA, if they are incurred:
- employing someone for personal, family or household work, such as a nanny, au pair, chauffeur, gardener. Prior to 6 April 2015 this category also included care support workers, but from 6 April 2015 where all an employee's duties are performed for a person who needs support because of old age, mental or physical disability or past or present alcohol or drug dependence, illness or mental disorder any Secondary Class 1 NICs are not 'excluded liabilities';
- on deemed payments of employment income for workers supplied by personal and managed service companies;
- by an employer who has had a business, or part of a business, transferred to them in the relevant tax year and the payments relate to an employee employed (either wholly or partly) for purposes connected with the transferred business, or part business; or
- as a result of avoidance arrangements.
The Summer Budget 2015 also announced that from April 2016, companies where the director is the sole employee will no longer be able to claim the employment allowance.
August Questions and Answers
Q. I have realised that I made a mistake on my most recent VAT return. What should I do?
A. You can adjust your current VAT account to correct errors on past returns if the error:
- was below the reporting threshold (broadly, less than £10,000, or up to 1% of your box 6 figure (up to a maximum of £50,000);
- was not deliberate; and
- relates to an accounting period that ended less than 4 years ago.
When you submit your next return, add the net value to box 1 for tax due to HMRC, or to box 4 for tax due to you. Make sure you keep good accurate records relating to the adjustment.
Q. A friend has told me that I may be entitled to a larger state pension if I pay Class 3A national insurance contributions. What are they and how do I know if paying them is worthwhile?
A. Class 3A is a new voluntary type of national insurance contribution (NIC) that is being introduced from 12 October 2015. Broadly, between then and 5 April 2017 certain people will be able to make a contribution to top up their state pension by up to £25 per week. Men born before 6 April 1951 and women born before 6 April 1953 will be eligible to make top up payments. The cost of the contribution will depend on how much extra pension the applicant wants to qualify for (between £1 and £25 per week), and how old they are when they make the contribution. A top up calculator is available on the GOV.uk website at www.gov.uk/state-pension-topup/y. The calculator will help you work out whether it is worthwhile you making Class 3A contributions.
Q. I have assets worth around £600,000, including my home. I am single, have never been married and have no children. I intend leaving my estate to my siblings. Will they qualify as 'direct descendants' and, in turn, will I qualify for the extra £175,000 family home inheritance tax allowance that was announced in the Summer Budget?
A. The draft legislation and guidance on this issue states that the relief will only be available where the family home is passed to children. This includes stepchildren, adopted and foster children, plus grandchildren. Therefore the family home allowance will not be available.
August Key Tax Dates
2 - Last day for car change notifications in the quarter to 5 July - Use P46 Car
19/22 - PAYE/NIC, student loan and CIS deductions due for month to 5/8/2015
We are committed to ensuring none of our clients pay a penny more in tax than is necessary and they receive useful tax and business advice and support throughout the year.
If you need further assistance just let us know – we're here to help!
Contact us today on 020 8780 2349 to discuss how any of the above affects your personal or business finances or get in touch with us via our contact page to arrange a complimentary, no-obligation meeting.
This blog is a general summary. It should not replace professional advice tailored to your specific circumstance.