Accommodation expenses can be a tax deductible expense for some Professional Contractors and Freelancers.
There are two aspects for a director to consider when deciding if a claim for accommodation is allowable against the profits of the company for corporation tax purposes:-
- Any expense must fall within the "wholly and necessarily" test for business expenses. In other words it must be a legitimate expense and any "personal use" will be disallowed. SE2740 of the HMRC Compliance Manual clearly states how they will look at the expense in this regard.
- For an expense to be deductible against the profits of the company, and for the expense not to be classed as a benefit in kind on the director, the normal travel expense rules apply ( see our article on temporary workplace rules).
Hotels and Bed & Breakfast.
The cost of accommodation and subsistence at a Hotel or Bed and Breakfast establishment whilst working away from an employees normal abode is a business expense.
The level of the costs involved is not normally a concern for HMRC in deciding if the expense is a business expense so staying in a one star B&B or a 5 star hotel is largely irrelevant, it is up to Company Policy, but HMRC will look to see if the class of accommodation is "appropriate" and SE1836 gives good guidance on this.
However, if staying in a 5* Hotel is some sort of reward rather than a business expense then it would be a potential issue, HMRC's manual at SE1835 explains this.
For Professional Contractors and Freelancers who have a normal place of abode but stay away when working on a contract site, attending an interview or meeting in order to gain work for your company, or undertaking business related training ; the costs will be classed as a business expense. The VAT can be reclaimed too.
Personal Incidental Expenses
When staying in a Hotel or B&B the director/employee can also claim a £5 a night for Personal Incidental Expenses in the UK and £10 when staying outside the UK. HMRC give guidance Section 200A ICTA 1988 which gives an exemption to tax on these expenses at SE2700.
This tax exemption is designed to cover the costs of laundry, newspapers, phone calls home from public phones etc...
Renting Accommodation
If renting accommodation is a reasonable and cost effective alternative to staying in a Hotel or B&B then these costs will be a business expense. HMRC guidance on this is in their compliance manuals at SE1836 and SE1837.
The associated costs of the utilities at the rented accommodation and Personal Incidental Expenses of either £5 (UK ) or £10 ( Overseas )can also be claimed.
The contract for the rental of the property should be in the name of the employer, the Limited Company.
If the family of the employee move with the employee, and the normal place of abode is still available, then the costs of renting accommodation would be apportioned between the business and personal use.
The most effective way of doing this is to divide the costs of all the people staying in the accommodation and then apply only those costs attributed to one employee.
The employee should always have access to a normal place of abode ( This HMRC example is useful ).
It follows therefore that if an employee rents their house out and moves to a new location, renting accommodation to perform a contract, the cost of the rented accommodation are not a business expense.
Renting a Room/Staying With Friends/Colleagues
The rules for this are no different to renting accommodation detailed above.
The Limited Company should have a contract with the supplier whether that be a friend/relative or colleague.
The supplier, if they own or rent the residential property, may well use the tax free exemption of the Rent A Room Scheme which allows a tax payer to receive up to £4,250 a year for renting out part of their home. HMRC's manual at PIM4001 gives full details for this scheme.