Contractor expenses are very simple to claim if you’re a Limited company contractor working outside of IR35 if you are working inside IR35 the list of what you can claim is a little shorter (an accountant can help you with this).
HM Revenue and Customs rules state that expenses can be claimed to provide they are wholly and exclusively for the purposes of your business.
Remember! You must be able to provide evidence you actually incurred the expenses if HM Revenue and Customs ever asked you, this is usually achieved by keeping receipts.
Our Contractor expenses frequently asked questions hub will answer in plain simple English the most commonly asked questions about contractor expenses that we receive weekly.
- What is the 24-month rule and how does it apply to me?
- Can I claim for a Christmas party?
- Can I claim for Entertaining?
- Can I claim for accommodation?
- Can I donate money to charity through my company?
- Can I claim for work clothing?
- How much can I claim for mileage?
- Claiming for use of home
One of the most common expenses to claim as a contractor is for travel. The 24-month rule was introduced in 1998 and allows travel from home to a qualifying workplace for up to 24 months. A qualifying workplace assumes the workplace passes a basic ‘temporary workplace’ test. Such as:
- The contract will last less than 24 months
- The length of the contract is uncertain
- The length of the contract is less than 24 months, however, if the contract gets extended past 24 months then from the date of change travel expenses can’t be claimed.
The 24th month is calculated from when you first start travelling to your clients’ premises from either your home or office, until the end of the contract if it is less than 24 months or until you have reason to believe your contract may last over 24 months.
For example, if you were to start a new contract with a different department but your end client remained the same, the 24-month rule does not restart with the new department you are working in, it continues to run from when the first contract was started with the client.
If the original was for 12 months and then you were offered another contract for 14 months to run simultaneously, which you accepted you would not be able to claim travel expenses from the point you knew your time at your client’s site will exceed 24 months.
The 24-month rule goes hand in hand with the 40% rule. It’s not uncommon for a contractor to return to the same workplace but on a different contract within a 24 month period. The 40% rule means that as long as that premises has been your workplace for less than 40% of the time between the original contract start date and the new contract start date travel expenses can be claimed and can be continued to be claimed until the time spent at the workplace exceeds either 24 months or 40%.
As a Limited company contractor working outside IR35, you can claim expenses for a Christmas party.
Your Christmas party will be considered an annual event. An annual event is an allowable expense and is also treated as a tax-free benefit as long you meet certain conditions such as:
- The price per head does not exceed £150. Even if you go 1p over the £150 the full amount will be subject to tax and national insurance.
- Everyone in your company needs to be invited. Though as a contractor this is likely to just be you!
- Partners are welcome to join you and will count for the £150 per head allowance.
The £150 a head allowance can be used at any time of the year and across multiple events. Although it is recommended that you just have one event to make it simple to calculate the £150 per head allowance. If you do decide to have more than one event in the year, for example, a summer barbecue you may need to justify to the HMRC that they are annual events and not just a night with your employees.
You can claim expenses for entertaining, however, unlike an annual event they will not be a tax-free benefit, as there is no corporation tax relief on entertaining; although through taking them as expenses through your company you will not be paying out of your taxed income nor are you personally paying the costs.
Similar to any expense the cost needs to be justified, so a day trip on a luxury yacht may be hard to justify for a few hundred pounds worth of business. Whereas a few drinks would be fairly simple to justify in this instance.
As a Limited company contractor, you can claim accommodation expenses when you are staying away from home due to work purposes. The only qualifying factor is that you have a permanent principal residence.
There is no limit to the amount you can claim back for accommodation, but the cost needs to be reasonable. For example, spending £300 a night on a hotel room wouldn’t exactly seem justifiable to HM Revenue & Customs (HMRC) however a £80 a night bed and breakfast would be perfectly acceptable. As long the cost is justifiable no questions should be asked.
This is similar to renting a furnished flat. Say you need to rent a hotel for a month as your contract required you to work away from your usual workplace for that period of time, a flat may be a cheaper and more convenient alternative. As long as the flat is to the same or less standard to that of your permanent residence, this could be a claimable business expense. Please note though, if your permanent residence is of a very high standard you may not be able to rent a flat of the same calibre and expense the full amount.
If you do decide to take a short-term lease out on a flat, it is advisable to set the lease up in your company name and pay it ideally from your company bank account. The full cost of the least should be allowed unless:
- The standard of the flat exceeds the standard of your permanent residence
- The contractors family is using the flat too
- The location of the flat is not near a temporary workplace.
Always remember that with any expense, a receipt must be kept for all transactions as proof of purchase, as HMRC may wish to see it as evidence that you actually incurred the expense.
Also, don’t forget that if you are an employee of your own limited company working away from home, a fixed sum of £5 per night (£10 for working abroad) may be claimed to cover incidental costs such as telephone calls, a newspaper or laundry.
Of course, you can and you can qualify for corporation tax relief on the donation as long as it is made directly to a registered charity, which avoids you having to the take the money out of your company as a dividend. To fully benefit from the corporation tax relief you need to make sure you do not make a tax loss as a result, your accountant will be able to help you to work this out. The below table will give you an idea of how much corporation tax relief you could be entitled to.
|£0 – 100||25% of the donation|
|£101 – £1,000||£25|
|Above £1,000||5% of the donation|
However, it may be beneficial to make a personal contribution instead of through your company. For example say you made a personal contribution of £100 it’s worth £125 for the charity as they can claim the basic rate of tax, 20% per cent on your donation.
If you are a higher rate taxpayer, for example, you pay 40% tax or 50% tax you can claim back the difference between the basic tax and your tax bracket on the gross value of your donation. In a nutshell, if you donated £100 and you pay 40% tax you can claim back £25 on your self-assessment.
£125 (your donation plus gift aid) multiplied by 20% (40% your rate of tax minus 20% the basic tax rate).
You’re best to seek the advice of an accountant to decide which method would be more beneficial to you, though unless it is a large donation the difference will be very little between the two options.
This is one of those expenses where the rule ‘wholly and exclusively for business purposes’ definitely applies. If you feel the item has a dual purpose, unfortunately, you cannot claim this back as a business expense.
You cannot claim for daily work clothes, as these could be used for purposes other than for your company. For example, a suit could be used for work and for a social event, or a jumper to keep you warm on an outdoor contract could be used for other than work purposes.
Though you can claim for specialist clothing, say you need a pair of steel cap boots. You’re unlikely to wear those outside of company uses so these could be expensed to the company. This is the same with items such as safety helmets and protective clothing.
Mileage claims depend on if the on the type of vehicle if it is a company vehicle or a vehicle you personally own. If you personally own the vehicle any travel to and from your temporary place of work can be claimed as an expense, at the following rates:
- First 10,000 miles in the tax year – 45p
- Over 10,000 miles in the tax year – 25p
These rates take into consideration the costs of running the vehicle and the fuel costs.
If it is a company vehicle how much you claim depends on the size of the vehicle engine, for example, a petrol car with an engine up to 14,000 is 15p a mile.
Mileage can also be claimed back as a passenger in car or van for any work journeys at a rate of 5p a mile.
If you use a motorcycle or a bicycle for work travel the mileage rates there is a flat rate of 24p a mile for a motorcycle and 20p for a bicycle.
If you work from home, as in you use a room in your home for business purposes you can claim for ‘home as office’ expenses.
In 2013 you will be able to claim back £4.00 a week, £18 per month or £208 a year towards household expenses. No records need to be kept to claim back this allowance. This £4.00 is towards the extra cost of gas and electricity to heat and light your work area and towards work phone calls.
It is important to remember you can’t claim back any expenses which could have a dual purpose such as line rental and broadband.
You can claim over £208 in a year however you need evidence of why you are. This can be provided by estimating what percentage of your property the room you use is and the time you use it. You can then add up the cost if your gas, electricity, water, cleaning costs, home and contents insurance and telephone line standing charge.
For example, if this total is £1,000 a month and your room is 10% of your house. Then that room is worth £100 a month and then you use it for work 50% of the time you can claim back £50 per month in expenses for it.
If you do need to buy any office furniture you may be able to claim it back through capital allowances. Strictly speaking anything you have to use in your work that is likely to last two years or more, there are some exceptions to this rule such as cars, vans, motorcycles and cycles, but generally anything that is wholly and exclusively for the use of the company and will last two years or more can be a company expense.
If you have any question about contracting or would like any further advice please request a call back below and one of our helpful team will be in touch.