What expenses can you claim when contracting abroad?

Working overseas can be an attractive option for contractors, especially if you can earn good rates or the work offers experience that’s hard to find in the UK. But what happens to your business expenses when you contract abroad?

Your limited company can usually claim tax relief on expenses incurred wholly and exclusively for business purposes.

If you take an overseas contract, you will always need to consider destination-specific issues (in general), and there may be further expense-related complications, especially if you stay for an extended period or bring your family.

Temporary workplace rules abroad

If you travel abroad to work at a client’s site, the first thing to consider is whether the site qualifies as a ‘temporary workplace’.

The same rules apply as they do to contracts in the UK. A workplace is normally deemed as temporary if you go there to do some work which has a limited duration

These two tests are important to understand:

• The 40% test – HMRC states that attendance at a site becomes ‘significant’ if you spend 40% or more of your working time there. However, if you spend less than 40% of your time at the site, it does not automatically become a temporary location, as you also have to consider the purpose of your attendance.
• The 24-month rule – If you expect to spend at least 40% of your working time at a workplace over a period beyond 24 months, it will normally be treated as a permanent location. And – crucially – this restriction applies the moment you’re aware that the posting will take you over the 24-month limit, not merely when you complete the two years.

For example, if you take on a six-month contract in Germany, your client’s office would normally qualify as a temporary workplace, provided the other conditions are met.

If the engagement is repeatedly extended and you eventually expect to spend more than 24 months at the same location, the way expenses are treated changes from the date you know you’ll hit the two year limit.

You can read more in our guide to the 24-month rule for contractor travel expenses.

Special travel rules for contractors working overseas

There are additional provisions for UK-resident employees and directors working abroad under the Income Tax (Earnings and Pensions) Act 2003.

Depending on your circumstances, these rules can provide relief for certain journeys between the UK and your overseas workplace, even when the ordinary temporary workplace rules do not apply.

For example, section 341 provides relief for qualifying journeys at the start and end of employment where you work entirely abroad. Section 370 deals with certain other journeys between the UK and an overseas workplace.

These provisions have their own conditions and do not provide a general exemption for every trip home or every cost associated with an overseas assignment.

Can your company pay for your family to visit you abroad?

One of the more useful overseas concessions relates to family members’ travel.

If you are a UK resident and work outside the UK for a continuous period of at least 60 days, you may be able to claim relief for qualifying travel costs paid or reimbursed by your employer (i.e. your own limited company) for your spouse, civil partner or children.

Under section 371 ITEPA 2003, this relief can cover up to two outward and two inward journeys per family member in a tax year.

Unsurprisingly, there are a number of conditions you must meet to qualify:

• The employee must be outside the UK for at least 60 consecutive days on business.
• The qualifying journey must be between the UK and the location where the employee (the contractor) is working abroad.
• Children must be aged under 18 at the start of the outward journey.
• The employee’s taxable earnings must include the relevant travel benefit or reimbursement for the statutory deduction to apply.

The relief does not cover unmarried partners unless they are in a civil partnership.

You can claim qualifying travel costs, including meals and overnight accommodation needed during the journey. However, you cannot claim for your family’s accommodation, meals, or other living expenses while they stay with you overseas.

An example: nine months contracting in Germany

Sarah runs her own UK limited company and accepts a nine-month software development contract in Munich. She remains UK resident, and the engagement falls outside IR35.

Her client’s office qualifies as a temporary workplace, and her company pays for her flights, accommodation, and reasonable subsistence costs while she works there.

As these are qualifying business expenses, the company can normally claim the appropriate Corporation Tax relief on the expenses, with the payments to Sarah treated under the relevant employment expenses rules.

During the assignment, Sarah’s husband flies to Germany twice to visit her. Provided the conditions of section 371 are met, and the company pays or reimburses the costs, tax relief may be available for his return journeys.

However, the hotel bills, restaurant meals and sightseeing expenses he incurs during the visits are treated as ‘personal’ costs, and don’t qualify under the family travel concession.

If Sarah extends the contract beyond its original nine-month term, she will also need to reconsider whether the temporary workplace rules still apply.

What overseas expenses can you claim?

Assuming the conditions mentioned above are satisfied, your limited company can usually claim relief for qualifying business expenditure such as:

• Flights, rail fares and other transport costs associated with the assignment.
• Hotel accommodation or other suitable temporary accommodation while working away.
• Reasonable meals and subsistence expenses which arise from qualifying business travel.
• Local transport between qualifying workplaces or for other necessary business journeys.
• Business-related telephone, internet and other costs incurred while carrying out the contract.

Again, you must exclude any personal expenses, including private sightseeing, holidays and ordinary living costs that do not qualify for employment expenses relief.

Given the added complexity of working abroad, keep copies of all your invoices, booking confirmations, and other records in a safe place.

Record overseas payments in sterling for your company’s accounts using an appropriate exchange rate, and use a consistent method to account for these expenses.

HMRC overseas subsistence benchmark rates

You do not necessarily have to reimburse every meal or hotel bill on an individual basis.

HMRC publishes overseas scale rates for accommodation and subsistence that cover many countries and cities.

These rates let employers reimburse qualifying overseas business travel expenses using published rates rather than relying entirely on individual receipts.

The rates vary by location and length of stay. They cover accommodation, meals, and incidental expenses, but you must use the correct rate for your trip and avoid claiming the same costs twice.

You don’t normally need to keep individual receipts if you’re using HMRC’s published rates, but you should keep records of your business trips, including the dates, destinations, purpose of each visit and any relevant travel or accommodation bookings.

If you’re claiming actual expenses instead, keep the receipts to support any claims.

What if you combine business travel with a holiday?

One of the main benefits of working overseas is the chance to spend a few extra days abroad after a contract, particularly if they are working somewhere they would otherwise like to visit.

This is perfectly reasonable, but you need to take extra care when deciding which expenses to claim through your company.

If you extend a genuine business trip by a few days for a holiday, the additional hotel accommodation, meals and leisure activities are obviously personal expenses.

You can usually still claim the cost of your original flight if the trip was primarily for business and staying longer for a holiday hasn’t increased the fare. If any of the travel costs relate to your holiday, you may need to exclude that portion from your claim.

If your family comes with you, you can’t normally claim their personal expenses through your company, although the special overseas family travel rules may allow relief for certain journeys.

What happens if your overseas contract falls inside IR35?

If your contract falls inside IR35, you face further restrictions on claiming travel and subsistence expenses.

Under the employment intermediaries rules, a contractor whose engagement would be treated as employment for tax purposes may be unable to claim tax relief for ordinary travel between home and the client’s workplace, even if the assignment is relatively short.

You may still be able to claim other business travel and expenses, although the usual restrictions on what qualifies for tax relief will apply.

If you’re working overseas, you’ll also need to consider whether IR35 applies to your contract and whether you have any tax obligations in the country where you’re working.

Don’t overlook overseas tax and social security obligations

If you take on a contract overseas, you may have to pay tax in the country where you’re working, even if you’re invoicing through your UK limited company.

Each country has its own rules, and you may need to deal with local income tax, social security contributions or other reporting requirements. Your company may also have overseas tax obligations.

Much depends on how long you’re working abroad, the type of work you’re doing and whether the UK has a tax treaty with the country concerned.

If you’re planning to spend several months working overseas, speak to your accountant before you go so you know where you stand.

Before you accept an overseas contract

Before you head overseas, chat with your accountant about what you can claim through your company, especially if you’re planning a longer stay or your family might come to visit.

Solid preparation before you depart can save you a lot of hassle (and costs) when it comes to preparing your accounts.