Contractors' Questions: Would renting a flat be a justifiable expense?

Contractor’s Question: I’ll soon start my first contract which is great but the client’s office is around 35-40 miles away from my home and driving can take a minimum of 1 hour as there’s normally light traffic. If it’s heavy, I could be late and this would impact my work.

As the engagement is for 6 months, I'm thinking about renting a flat close to the client’s office. But would this accommodation be a justifiable expense if HMRC scrutinised it?

Expert’s Answer: It is possible for accommodation expenses to be tax deductible as legitimate business expenses. However, there are currently no set definitions from HMRC concerning when accommodation expenses become justifiable.

HMRC’s general rule for claiming expenses is that they must be 'wholly, exclusively and necessarily in the performance of the duties’. As there are no set definitions, you as the director of your company will need to be able to justify the claim if it is later queried. When considering if your accommodation claim is justifiable, there are three key factors you will need to review – and answer:

Is there any personal benefit from the rented property?

There should be no personal benefits gained from a rented property. For example, you would not be able to provide residence for any family members at the rented property. Ideally the rental agreement should be in the company’s name and paid for directly from the company.

Do you still have a permanent residence?

You will still need to have a permanent residence that is not the rented property; you won’t be able to relocate to the rented property on a permanent basis. Your permanent residence must recognisably be your ‘home’; the place where you usually live and spend a majority of your time.  

Is the rented property more economical, practical and cost-reasonable than the alternatives?

When it comes to working out whether the rented property is more economical, one way is to compare the price against the mileage cost of your alternate transport and commute. Do the rental and associated costs work out as less than the 45p-a-mile claim of commuting each day? If so, the expense can be justified as economical and cost-reasonable. Whether renting a property is practical or not is a more subjective point that will depend on your location. For example, 35-40 miles in or around London may be a significantly longer journey than in other parts of the UK.

If you are happy that your rental property fulfils these three factors then you should be able to adequately justify the expense to HMRC if it was later challenged. In the meantime, good luck with the contract!

The expert was Greg Timson of contractor accountancy firm inniAccounts.