HMRC Rules on Contractor Accommodation and Subsistence Expenses
Accommodation costs are one of the most significant expense categories for contractors working away from home. Understanding what HMRC allows, and what it does not, prevents unexpected tax bills and protects contractors from HMRC enquiries. This guide covers the key rules for contractor accommodation expenses in the UK.
The Temporary Workplace Rule
The cornerstone of contractor accommodation expense claims is the temporary workplace rule. Under HMRC rules (ITEPA 2003), travel and subsistence expenses, which include accommodation, are allowable when a contractor is working at a temporary workplace.
A temporary workplace is defined as a location where the contractor works for a limited duration or for a temporary purpose. The default HMRC rule is that a workplace ceases to be temporary once the contractor has been there (or expects to be there) for more than 24 months.
Practical implications: If you are a contractor on a 6-month project at a single site, accommodation costs at or near that site are allowable expenses. If you have been at the same site for 22 months and extend for another 6, you are approaching the 24-month threshold and should seek advice.
The 40% rule: A workplace is not temporary if the contractor spends more than 40% of their working time there over a significant period. Site attendance patterns matter.
What Accommodation Expenses HMRC Allows
Contractors working through a limited company (personal service company or PSC) can claim accommodation expenses where they are working at a temporary workplace and the accommodation is necessary because the site is too far to commute from their home address.
Allowable costs include: nightly accommodation rates, weekly or monthly rental costs near the temporary workplace, costs of accommodation for the nights when working late or starting very early makes commuting impractical.
Receipts are required: HMRC expects receipts or invoices for all accommodation expense claims. A professional invoice from an accommodation provider (as distinct from a handwritten receipt) is significantly more defensible during any enquiry.
The accommodation must be reasonably priced: HMRC does not specify a nightly cap for accommodation expenses, but unreasonably expensive accommodation (five-star hotels when three-star would suffice) may be challenged. The test is whether the expenditure is wholly, exclusively, and necessarily incurred for business purposes.
Subsistence Allowances for Contractors Working Away
In addition to accommodation costs, contractors working away from home can claim subsistence expenses, food, non-alcoholic drinks, and incidental costs incurred while away from their normal workplace.
HMRC benchmark rates for subsistence: These are the amounts HMRC considers reasonable without requiring receipts. £5 for absence of more than 5 hours. £10 for absence of more than 10 hours. £25 for absence of more than 15 hours and away from home overnight. These are floors, not ceilings, actual costs above these amounts can be claimed with receipts.
The accommodation benefit: Working from accommodation with a kitchen significantly reduces subsistence costs. If your team is cooking their own meals rather than eating in restaurants, the cost is lower and the claim is simpler. Self-catering accommodation is both more cost-effective for employers and creates a simpler expense picture for contractors.
IR35 Considerations
IR35 status affects how accommodation and subsistence expenses are treated. Contractors who are inside IR35 are treated as employees for tax purposes and their expense entitlements are significantly restricted.
Inside IR35: Accommodation and subsistence expenses paid by the hirer (client) are treated as employment income and are subject to PAYE and NICs unless paid under a specific dispensation arrangement. Contractors inside IR35 cannot claim these expenses through their limited company in the same way.
Outside IR35: Contractors outside IR35 retain full ability to claim allowable business expenses through their PSC, subject to the temporary workplace rules outlined above.
If you are unsure of your IR35 status, seek advice from a specialist contractor accountant before making accommodation expense claims. The consequences of incorrect claims include penalties, interest, and back-taxes.
Practical Steps to Claim Accommodation Expenses Correctly
Step 1: Confirm your working pattern is at a temporary workplace. If you have been at the same client site for more than 18 months, take advice before continuing to claim.
Step 2: Get proper invoices. Ask your accommodation provider for VAT invoices made out to your limited company (not to you personally). This supports both the expense claim and any VAT recovery.
Step 3: Keep a travel log. Record dates of travel, distances, and the business purpose. This corroborates your temporary workplace status.
Step 4: Use the HMRC benchmark rates as a floor, not a ceiling. If your actual costs exceed the benchmark rates, claim actuals with receipts.
Step 5: Check with your accountant annually. HMRC rates and rules do change. A 15-minute conversation with your accountant at the start of each tax year costs nothing and prevents expensive mistakes.
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Overnightly provides contractor accommodation across the UK with proper VAT invoices suitable for business expense claims. All bookings include an invoice made out to your company. Call 0115 718 1937 or visit overnightly.com for a quote.
