Inland Revenue’s Scrutiny of Expense Claims for Independent Contractors

Inland Revenue is closely monitoring expenses claimed by independent contractors against their earned income. It’s crucial to ensure that you are correctly claiming expenses and understand the implications of a recent decision by Inland Revenue.

Following the release of IS 21/06 last year, which concluded that self-employed individuals cannot deduct meal expenses due to their private nature, Inland Revenue has now disallowed deductions claimed by a self-employed person for travel, accommodation, and meals while working away from home.

This decision reflects Inland Revenue’s increased focus on compliance among small self-employed taxpayers. They are imposing stricter requirements for supporting deductions, which may diverge from the treatment for employers and employees regarding travel, accommodation, and meal costs.

Moving forward, it is critical to have proper documentation supporting the basis for deducting business expenses that could be considered private. This documentation should reference the necessity of the expenditure for the contracting activity.

Overview of the TDS Decision

A tax technical decision summary (TDS) has been released by Inland Revenue concerning an individual involved in multiple ventures. The taxpayer operates a farm as a self-employed person and also earns schedular income as an independent contractor. They claimed deductions for travel, meal, and accommodation expenses incurred while working in a different city than their residence.

Inland Revenue denied the deductions for travel and accommodation costs since the work in each location was unrelated, and travel between the two cities was not required for either activity. The costs were considered as incurred to enable the taxpayer to undertake their activity, rather than being directly related to the income-earning activity. Meal expenses were also denied since they were deemed private and not a requirement of the contracting work.

Implications for Self-Employed Individuals

While the decision may not directly apply to all taxpayers, it raises questions for self-employed individuals in an increasingly mobile world where the boundaries between home and work have blurred. Inland Revenue appears to be imposing a higher burden of proof for deductions compared to companies providing tax-free allowances or reimbursements to employees.

Many independent contractors frequently travel or spend time away from home for their contractual activity. They often claim travel, accommodation, and meal costs as deductible business expenses, arguing that these costs are incurred in the course of their taxable activity and not of a private nature.

Differentiating situations from the specific case is important. For instance, if a taxpayer usually works from home and occasionally visits client sites in another town for meetings, the travel from home to the client site may be considered a deductible business expense.

Exercise Caution and Maintain Proper Records

Inland Revenue has started focusing more on deductions claimed by individuals. This case emphasizes the importance of documentation to support expense claims. It is crucial to keep accurate records of business-related expenses, including the reasons behind them. When deducting expenses that could be viewed as private or related to generating taxable income, documentation should be maintained to justify the costs incurred in carrying out business activities. This will help support your position in case of an Inland Revenue review.

Your Outside Team