Contractor expenses – a guide to expenses and claiming

Knowledge base from Boox

By Lynne Gowers on 7th September 2018

Contractor expenses – a guide to expenses and claiming

As a limited company contractor, claiming tax relief on expenses directly influences your profit and how much tax your company pays. Therefore it’s important to be clear what can and cannot be claimed, so that you can run your company efficiently while staying on the right side of HMRC.

contractor expenses

Contents:

Limited company expenses – the basics
Quick overview
FAQs
Contractor travel expenses explained
Limited company food expenses
Pre-trading expenses for limited companies
Training expenses – what limited company contractors can claim
Contractor expenses and IR35

Limited company expenses – the basics

Whether your company can get get tax relief on expenses is initially determined by whether the contract is caught by IR35 or not (See Contractor expenses and IR35)

Before we go in to details of what business expenses you can claim through your limited company (and on the assumption that your contract is not caught by IR35), here are 5 basic points which apply to all:

  1. Only expenses that are “wholly, exclusively and necessarily” incurred in the course of your contractual duties are claimable.
  2. The majority of expenses are used to reduce the company’s Corporation Tax liability, although there are a few exceptions to this (eg. business entertainment).
  3. You can’t claim expenses which are for joint business and personal use. This is known as “duality of purpose”.
  4. Expenses can either be paid directly from your company bank account, or if you incur them personally, you can reclaim them from the company.
  5. You should retain all receipts and invoices pertaining to expenses, in case claims are challenged.

Contractor expenses quick overview

Use our quick alphabetical list to see if your expense may be claimable:

Accommodation when away from home
Accountancy fees and certain other professional fees
Advertising
Bank charges
Business credit cards
Business insurance, including Professional Indemnity cover
Company formation costs
Employers’ National Insurance Contributions
Entertaining clients
Equipment such as laptops
Home office expenses
Magazine subscriptions – to professional publications related to your work
Marketing
Mileage, if you use you use your own car for business travel
Parking, if you have to travel to sites other than your regular workplace
Pension contributions to an approved executive pension scheme
Postage
Printing
Professional subscriptions (only certain organisations are allowable)
Salaries of employees (including you)
Stationery
Telephone, mobile and broadband costs, but contracts must be in the name of the company
Training courses, so long as they are directly related to your contract
Travel if you are travelling to sites other than your regular workplace

Contractor expenses FAQs

Limited company what expenses can I claim?

You are entitled to Corporation Tax relief on the costs of running your business. Any expenses you claim must be within HMRC’s guidelines and should be “wholly, exclusively and necessarily” incurred for your business.

These include any formation expenses and pre-trading expenditure when you first set up your limited company.

In the course of your everyday operations, there are a number of expenses which you may be able to claim. Some of these are listed here.

Can I claim for a laptop or tablet for business use?

In short yes, a laptop or tablet is a claimable expense.

However, they will usually be accounted for as fixed assets in the company as they are an asset that you will keep in the company and last for more than one year.  Capital Allowance can be claimed by the company to get Corporation Tax relief on the cost of the asset.

In order to avoid a potential benefit in kind (BIK) charge, you must be able to demonstrate that it was bought principally for business use and that you wouldn’t be able to carry out your work without it.

Interestingly, although they have much of the same functionality as smart phones, tablets are treated the same as computers / laptops under expenses rules, not mobile phones. This is because their primary purpose is not for making calls.

 

How do I identify whether an expense is tax deductible or not?

Contrary to popular belief, there is no definitive list of tax deductible business expenses. Determining whether an expense is tax deductible is usually down to identifying whether it was incurred “wholly, exclusively and necessarily” for business purposes.

It’s also important to keep accurate records and receipts for everything you claim, so that if HMRC come calling, you can easily substantiate the deductions.

How often can I claim limited company expenses?

You can claim expenses from your limited company at any frequency of your choosing. Some company directors claim quarterly to tie in with the VAT return cycle, others claim whenever they have incurred the cost personally.

Cash flow can also affect when expenses are claimed. If there are invoices outstanding and not enough cash in the business to reimburse expenses, there is little point in making a claim at that time. However business expenses can still be recorded and accrued until such times as there is enough cash in the company bank account.

How should I process my limited company expenses?

Documenting expenses used to be a case of logging them on paper or keeping a dedicated spreadsheet.

Nowadays, processing limited company expenses has been made much easier with specialist online accounting software. The likes of Xero, Freeagent and the Boox app lets you track, claim and repay your business expenses without putting pen to paper, although you still need to keep copies of the invoices to back up the claim (hard copies or electronic scanned copies).

Is entertaining claimable?

While you can claim back the costs of entertaining and hospitality which you incur personally, perhaps surprisingly your limited company can’t claim Corporation Tax relief on such costs as HMRC don’t think they meet the “wholly, exclusively and necessarily” test.

The VAT element of entertaining can only be claimed when it relates to staff.

However there are a couple of exceptions:

  • Promotional gifts (other than food, drink, tobacco or vouchers)
  • Certain “Trivial benefits” provided to employees, such as small seasonal gifts or a Christmas party for all employees.

You don’t have to pay tax on a benefit for your employee if all of the following apply:

  • it cost you £50 or less to provide
  • it isn’t cash or a cash voucher
  • it isn’t a reward for their work or performance
  • it isn’t in the terms of their contract

You can’t receive trivial benefits worth more than £300 in a tax year if you’re the director of a ‘close’ company.
A close company is a limited company that’s run by 5 or fewer shareholders.

There are other rules you need to be aware of if you are an employer providing social functions such as Christmas parties for all employers.

To be exempt of having to report on the employees P11D and pay Class 1A national insurance on the full cost of the function, the event must meet all of the following tests:

  • £150 or less per head
  • annual, such as a Christmas party or summer barbecue
  • open to all your employees

If there are multiple events, as long as the combined cost of the events is no more than £150 per person, they’re still exempt.

Contractor travel expenses explained

Generally speaking, you can claim the costs of your business travel, but not the cost of travelling between work and your permanent place of business.

The 24-month rule

If you are working at a series of different addresses, these are considered as temporary workplaces for tax purposes and you can claim the cost of travelling to, from and between them (other than if your contract is caught by IR35).

However, if you have worked, or are likely to work, at the same place for over 24 months and have spent more than 40% of your working time there, that workplace is classed as permanent and you will not be able to claim travel (or subsistence) associated with that workplace.

Find out more about the 24-month rule here

Mileage

If you use your personal vehicle for business travel, you can claim a mileage allowance from your company.

This is fixed rate allowance, based on HMRC’s approved mileage rates and includes all costs associated with the use of the vehicle, including the running costs, such as insurance, tax and MOT.

HMRC approved mileage rates

 VehicleUp to 10,000 miles in tax year Over 10,000 in tax year
 Car or van45p25p
 Motorbike24p24p
 Bicycle20p20p


Example calculation:
 If you did a business journey of 165 miles in your personal car, you would be able to claim £74.25 back from your company (£0.45 x 165). This amount would be then be deductible from the company’s profit for Corporation Tax.

Company cars

If you buy a car through your limited company, the company can claim Capital Allowances to gain tax relief on the purchase price, which reduces the company’s taxable profit.

The Capital Allowance is dependent on the vehicle CO2 emission levels. For 2018-19 the annual allowances are as follows:

  • CO2 emissions of 110g/km or less = 18%
  • CO2 emissions over 110g/km = 8%
  • First year allowances for electric cars are 100% so long as CO2 emissions are below 50g/km.

The company will also get tax relief on the running costs of the car, such as vehicle tax and insurance. These are deductible expenses for Corporation Tax.

The company can’t normally reclaim the VAT on the cost of a new car, but the VAT on running costs is claimable.

Be aware that if a company vehicle is available for your private use, it will be taxed as a Benefit in Kind.

Depending on the car and the amount of business mileage you do, it can be more tax efficient to own the car personally and claim the 45p mileage allowance. However this depends on your personal circumstances. Your accountant will be able to help you work out what is right for you and your company.

Other business travel costs

Aside from the driving, other travel costs should be claimable so long as the workplace you are attending is temporary (See 24 month rule)

These include:

  • Flights
  • Ferry crossings
  • Taxis
  • Train and tube fares
  • Bus tickets
  • Car parking
  • Tolls
  • Accommodation (if you need to stay away overnight)

Where the workplace is permanent, some costs are still allowable such as a taxi home after occasional and irregular late-night working.

Limited company food expenses

Food expenses, or “subsistence”, are deductible in certain circumstances. The food in question must be outside of your normal living expenses (so a proportion of your weekly shop would not be exempt).

Examples of deductible food expenses would include having to eat in a client’s company canteen, or where the meal is part and parcel of you travelling on qualifying business travel if you are not able to get home for a meal because you are working or travelling for work.

You must keep receipts for all food expenses.

The 24 month rule for travel also applies to subsistence.

Pre-trading expenses for limited companies

When you are starting out, there are certain costs attached to setting up your limited company and getting your business established. These are usually deductible from your company profit for tax.

Deductible pre-trading expenses include:

  • Company formation costs – this can be done by yourself with Companies House, through a formation agent or using an accountant
  • Pre-trading costs – eg. setting up your website or advertising
  • Equipment – such as a laptop, computer software or company mobile phone
  • Setting up an office – including deposit, rent and furniture
  • Business insurances – Public liability, Employers Liability and Professional Indemnity cover are all deductible expenses.

Read more about setting up a limited company

Training expenses – what limited company contractors can claim

Investment in training can be really beneficial for contractors in order to maintain and upgrade their skills. Although most relevant training costs can be claimed, some types of training are excluded by HMRC.

As a limited company director / shareholder you can provide training for your employees and any courses which are directly linked to your business and industry can be deducted against your company’s Corporation Tax.

While you can claim a tax deduction on training that will keep you up to date in your industry, you may not be able to claim a course that gives you new skills.

HMRC’s guidance on this states:

“In considering the question of purpose, you should not take an unduly narrow view of whether the content of any particular course only updates existing skills of the individual. But if it is clear that, for example, a completely new specialisation or qualification will be acquired as a result of the expenditure, it is unlikely that the expenditure will be wholly and exclusively for the purposes of the existing trade.”

Contractor expenses and IR35

If your contract is caught by IR35, you are paid “deemed payments”, meaning that tax and national insurance contributions are applied to your income, just as they would be for an employee.

Contractors working inside of IR35 cannot claim everyday expenses such as travel, subsistence and accommodation as the position is deemed as permanent for the purposes of the 24 month rule.

Expenses where you could have claimed a deduction against your earnings if you were employed by the client can be claimed. However, these “employment expenses” need to be wholly, exclusively and necessarily incurred, so can be hard to claim in reality.

Pension payments can be claimed as allowable as the cost is taken deducted from the income before the deemed payment is calculated.

HMRC’s flat-rate 5% “expense allowance” currently allows limited company contractors in the private sector to claim back 5% of income generated through the contract which is inside IR35, to cover the costs of running the company.

Further to reforms to IR35 in the public sector which were introduced in April 2017, contractors working under IR35 on public sector contracts can no longer claim the flat-rate allowance.
It looks increasingly likely that these unpopular reforms will be extended to the private sector, possibly as soon as April 2019.

For the latest news on this visit our IR35 help and advice page

What is IR35?

New to IR35? Our short video gives a quick overview.

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