Contractor's Guide to Expenses

HM Revenue and Customs have produced a heavyweight 100 page guide called: 'Expenses and benefits - A tax guide'. However, if you don’t have the time to read this epic, find below SJD’s handy guide.

What exactly is an expense?

One of the main benefits available to contractors is the ability to claim business expenses. A business expense is a cost that has been incurred wholly and exclusively for business purposes and through claiming such costs as an expense you will not pay tax on the amount. This article will discuss how expenses will affect your tax bill, how to claim an expense and looks at some examples of common expenses. You may also want to download your FREE PDF copy of our Contractor's Guide to Expenses here. 

You’ll probably incur some expenses during the course of your contracts, simply pay for these with your own money and then your company will reimburse you. To do this you’ll just need to do either a bacs transfer from your business bank account or write yourself a cheque from your company bank account cheque book. Alternatively, you can pay for the expense directly from your business bank account.

How do expenses affect my tax bill?

Please be aware that this section is very simplified and acts as a brief overview of how expenses will affect your tax bill. You should speak to your accountant if you would like a more detailed explanation.

Expenses are not taxed, so for example, if your contract is £10,000 a month and you do not have any expenses for the month, if you were to withdraw all the £10,000, you would pay tax on the full £10,000. 

However, if you had £2,000 of expenses, you would only pay tax on £8,000 and in doing so pay less tax overall as the £2,000 that you spent in expenses does not incur any tax.

It doesn't work exactly like this as this example does not include the effect of your PAYE salary, dividends or even the flat rate VAT scheme, but hopefully it will give you a basic understanding of how expenses affect your tax bill.

Remember! You must be able to provide evidence you actually incurred the expense, if HM Revenue and Customs (HMRC) were to ever investigate your circumstances. This is usually achieved by keeping receipts.

What expenses can I claim as a contractor working through my own Limited company?

If you’re a contractor working through your own Limited company and are outside IR35 then life is very simple. HMRC’s rules state that expenses can be claimed provided they are wholly and exclusively for the purposes of your business. This means you can claim  costs like: company formation fees, accountancy fees, business travel and accommodation, postage, stationery, telephone calls, employer’s National Insurance contributions, subscriptions, insurance, contributions to an executive pension plan, business entertainment etc.

What is a valid business expense?

  • Meal allowance

You can claim actual meal costs whilst you are working at a remote site, away from your normal place of work, or when staying away from home overnight, but daily, round sum claims for meals are not permitted.

  • Travel expenses

You can claim the cost of travel to and from your temporary place of work. Mileage rates are 45p per mile for the first 10,000 miles in any fiscal year and then 25p per mile thereafter. This allowance is to cover fuel and running costs of the vehicle. If you are travelling to work as a passenger in a car you are entitled to claim 5p per mile. You can also claim for parking and the congestion charges, but you may not claim for parking fines or speeding fines. The cost of travel by public transport can be claimed, but you must have a valid receipt. A mileage allowance can also be claimed for travel by motorcycle and bicycle at rates of 24p per mile and 20p per mile respectively.

  • Accommodation

The cost of hotel or bed and breakfast accommodation can be claimed as an expense, as can the reasonable cost of additional meals taken in conjunction with overnight accommodation. There are no set allowances for accommodation but the cost must be deemed to be 'reasonable'; this also applies to the cost of meals.

  • Clothing

You cannot claim for ordinary clothing which would form part of an 'every day' wardrobe even if you would not be likely to wear your working clothes anywhere other than at work, for example a business suit. However, if you have an item of clothing that is essential to carry out your contract such as protective clothing or branded uniform this is usually classed as an allowable expense.

  • Training

Providing that the training course is wholly and exclusively relevant to the performance of your duties under your existing contract then you can claim this as an expense.

  • Pensions

Pensions are big news as they represent one of the few remaining tax breaks available to contractors. You can invest part of your income into a company pension scheme. You save not only the income tax that would ordinarily be payable but due to the pension contribution, your employer’s and employee's national insurance contributions are lower than they would have been. The amount of tax relief can be as much as 48% meaning that for each £100 invested you pay £52 and the tax man pays the rest.

  • Pre-trading expenses

Some contractors may have costs that they incurred prior to setting up their Limited company, such as travelling to meet a client, phone bills or equipment costs. Provided that the expense was incurred within seven years of your first day of business and the cost is a legitimate expense and would still be classed as an expense if it had been incurred whilst your company was trading, then you are able to claim the amount as a business expense.

What if I’m inside IR35, what expenses can I claim?

If your contract is caught by IR35 then the only expenses claimable are: administration expenses which are fixed at 5% of your contract income, , pension contributions and certain professional subscriptions. You should however, still record and receipt all business expenses.

Do I need to keep my receipts?

We recommend that you keep either the original or a digital copy of all your expense receipts because although your accountant will not need to see them,  HMRC, if they choose to investigate, can go back as far as six years. 

Changes to travel and subsistence expenses

In March 2015 the government announced that they were planning to change the way workers who are employed through intermediaries such as umbrella company contractors and Limited company contractors who are working inside of IR35 can claim travel and subsistence expenses. These changes will not affect Limited company contractors who are deemed to be outside of IR35. For more information on how these proposed changes will affect you please visit our changes to travel and subsistence expenses for contractors page.

One final word, remember you cannot claim for something you didn’t actually pay for in the first place, or can’t provide evidence that you did. You will be personally liable for any underpaid taxes NOT the company you're working through or taking advice from. You should therefore steer clear of companies and scheme providers promoting generous expense allowances with 'NO' receipts required.

For more information on expenses please visit our Contractor Expenses - Frequently Asked Questions page.

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If you have any questions about contracting or would like any further advice please call our new client services helpdesk on Freephone 0500 152500 / 01442 275789 or email:nikki.hanlon@sjdaccountancy.com.

SJD Accountancy

SJD Accountancy are the UK's largest specialist provider of fixed fee, Limited company accountancy services to contractors; we've been acting for contractors across the UK since 1992 and have more than 15,000 clients.

We are the only national specialist firm of contractor accountants with offices nationwide. SJD Accountancy has more qualified staff than any other firm in our market with qualifications from the following major tax and accountancy bodies - ATT, AAT, CTA, ACCA, CA, ACA and FCCA.

  • Unlimited face to face meetings. This is a unique service only SJD Accountancy offers - unlimited face to face meetings across the UK - tax is complicated and sometimes only a meeting will do.
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If you have any questions about contracting or would like any further advice please call our new client services helpdesk on 01442 275789 or email: lisa.wood@sjdaccountancy.com.

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