Contractors’ Questions: With an end-user not paying travel costs, is it more tax-efficient to claim via self-assessment or have the PSC pay?

Contractor’s Question: My wife’s company pays mileage under the 45p a mile rate so we can claim the difference back.

She has to travel to university two days a week, as she’s doing a training-type employment. Attendance to university is terms of the employment, but she found out a few months in when her claim got refused that they won't pay mileage to the campus.

We could argue it with her employer, but she doesn't want to get into it with them.

We think we can claim this from self-assessment as the travel is mandatory to the job; it's just a policy decision from the university that they don’t want to pay it yet it falls clearly into the category of ‘travelling for work not re-imbursed by the client.’ Please advise if we’re on the right track.

Expert’s Answer: While this question refers, specifically, to an employee, rather than a contractor, we can nevertheless expand the scope to cover more general situations.

Mileage Allowance Relief recap

The questioner is quite right that, if the company pays for business mileage at a rate below the HMRC-permitted 45 pence per mile for the first 10,000 miles in a tax year (25p per mile thereafter), then the employee can claim, via the self-assessment tax return, tax relief on the business mileage for the year at the appropriate rate -- less the amount that has been reimbursed.  This is known as Mileage Allowance Relief (MAR)

For the travel to be business mileage, it has to be “necessary” travel to a “temporary workplace.” In the question, it is ‘necessary’ because attendance at the university is part of the employment contract. However, is it temporary? Two separate rules combine to say that:

“Where an employee has spent, or is likely to spend, 40% or more of his or her working time at that particular workplace over a period that lasts, or is likely to last, more than 24 months, then it is not a temporary workplace”.

Assumptions, duration, and why the employer isn’t reimbursing travel

We have to make some assumptions about the circumstances in the question. Let us assume a five-day week (two at campus and two working elsewhere), and university days are the same length as a working day, with the university course being at least two years in duration. 

Well, the days on-campus represent exactly 40% of the employee’s working time and it will be for more than 24 months. Under the rules above, attendance at university is to a permanent workplace and so the travel costs do not qualify.

This likely to be the reason why the employer is not reimbursing the travel expenses -- the employee effectively has two permanent places of work, one being the uni and the other being wherever they work on the other 3 days.

What could qualify as a temporary workplace

What if one of the campus days is actually only, say, half a working day, and the week is 4.5 days? That represents only 33.3% of the working time. As this is less than 40% of the working time, it would qualify as a temporary workplace, and the 24-month rule does not need to be considered.

Also, note usage of the phrase in the rules “or is likely”. 

If, at the beginning of the campus attendance, it is two full days, then that is not a temporary workplace. However, if the uni course changes such that only 1.5 days attendance is required, then, from that point (and only from that point), the uni becomes a ‘temporary workplace’ and tax relief on the travel can be claimed via the self-assessment tax return.

Similarly, if the campus course is shortened to less than 24 months then, from that point, the uni becomes a ‘temporary workplace’ and relief can be claimed.

How does this apply to a contractor with their own limited company/PSC?

Let us assume that the PSC has a contract which requires the contractor to attend a client’s premises for part of the week and different premises for the rest of the week. We apply the same rules as above. Is the contractor going to spend less than 40% of their working time at that location? If so, it is a temporary workplace. If more than 40% of their time, is it going to be for 24 months or more? If not, then it is a ‘temporary workplace’ and, otherwise, is a ‘permanent workplace.’

The same would apply if it was two different clients, since we are looking at the contractors’ working time as an employee of their Personal Service Company (PSC).

And finally, tax-efficiency…

The big difference between the contractor with their own PSC, and the employee in the question, is that the PSC should pay the contractor the appropriate mileage rate for the travel to the temporary locations, as this is more tax-efficient than making a claim via the self-assessment tax return.

The expert was Graham Jenner, founder of chartered accountancy firm Jenner & Co.