Contractors’ Questions: Does HMRC’s 24-month rule apply to umbrella company contractors?

Contractor’s Question: Is there guidance available on who the 24-month rule affects and how, I think, working through an umbrella company is out of scope?

I’m currently working at a company that has mentioned the two-year rule to me and I want to present something official in response, ahead of them trying to enforce the 24-month limit on my assignment! I was a limited company many moons ago, so am a bit rusty on what’s what with contractor expenses. Please advise.

Expert’s Answer:  It’s not uncommon for there to be confusion around the ‘2-year rule’ -- or ‘24-month rule’ as its more widely known.

But I’m sorry to say that the rule does apply when working through an umbrella company, providing you are not operating under Supervision, Direction or Control and are legitimately entitled to claim expenses for tax relief purposes.

Keep in mind, the 24-month rule is about who cannot claim tax relief on travel and subsistence expenses. There are two parts to the test, both of which must be met:

1. The employee must have spent or be likely to spend more than 40% of their working time at a workplace, and;
2. They must attend it or be likely to attend the workplace over a period lasting more than 24 months.

If you meet both conditions, HMRC will deem your workplace ‘permanent’ and not temporary, and as a result you will not be able to claim tax relief on your travel and subsistence expenses.

An important aspect of this HMRC rule which often gets overlooked is that the rule applies at the point you are made aware that your assignment will last 24 months or more. Therefore, if your agency/end-client issues your umbrella company with an assignment that has an end date exceeding two years, you will not be able to claim tax relief for that entire assignment. That’s possibly why it’s often referred to as the 2-year rule!

For contractors such as yourself, here are a few other key considerations:

• 24 months is the total calendar period in question, and not the amount of time you spend working for a client. So if you start working for a client on January 1 2022 and you work six months on and then six months off, or even work just 2 days a week, you would still reach 24 months on 1st January 2024. This is the case even if you sign new contracts along the way.
• However the 40% rule mentioned above applies. So a 15-month break (60% of any two-year period) would be enough to ensure that the 24-month rule did not apply.
• If the length of the contract is unknown, you can claim tax relief if it is assumed that the agreement will not last 24 months or more.
• If someone in the contractual chain (i.e., an agency) has produced a false contract or assignment schedule which enables a contractor to incorrectly tax relief on their expenses, any liabilities could be passed to the agency.

Lastly, a final point to mention given that you have worked through your own limited company previously, is that the 24-month rule does not have a bearing on your IR35 status. Yet be aware, HMRC can claim any unpaid tax back from you in the event of an IR35 investigation!

The expert was Shelley Ankers-Wainwright, managing director of umbrella company compliance consultancy SAW Consulting