Contractor's Guide to Expenses

One of the main benefits available to contractors is the ability to claim business expenses, meaning you can receive tax relief on these expenses. 

What is a business expense?

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 limited company expenses and looks at some examples of common expenses.

For more information, you can also download our PDF copy of our Contractor's Guide to Expenses here

You will 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 will need to do one of the following:

Transfer the funds from your business account via BACS

Write yourself a cheque from your company bank account cheque book

Pay for the expense directly from your business bank account

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, 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 and business entertainment.

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What is a valid business expense?

There are certain allowable expenses for a contract which falls outside IR35, such as the following:

Meal allowance

You can claim 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 everyday 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.

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 expenses can I claim if I’m inside IR35?

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. Although your accountant will not need to see them, HMRC can go back as far as six years, should they choose to investigate. 

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.

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. 

Support from SJD

If you have any questions about contracting or would like any further advice, please call our new business team on 01442 275789 or email newbusiness@sjdaccountancy.com.