For many who have only worked full-time before, expenses are a new challenge, with unexpected subtleties when becoming a contractor. What can you claim for? How should you best manage your receipts?
I spent 5 years as a permie before making the move into contracting over the past decade.
As a permanent employee, claiming expenses was a fairly simple process – I’d either pay for things like my travel to a client, taxis, or buying software with my company credit card, or use my own money (depending on the set up) and then claim it back.
Most large companies have expenses policies, so you know what you can and can’t claim for. You send in copies of all your receipts, and if you’re personally out of pocket, there are usually some well-oiled procedures to make sure you’re reimbursed in full.
As a contractor, the process is pretty similar, you just need to be more aware of what you can legitimately claim for, and spend a little time keeping on top of your expense paperwork.
Like most of my contractor colleagues, my accounting needs are pretty simple. I usually have half a dozen expenses to record each month. Several are recurring expenses such as accountancy fees and subscriptions, and there are usually a few extra ones (such as if I buy some software, or replenish the stationery cupboard).
On average, I only need to spend a few hours every few months to keep my records and spreadsheets updated.
The key thing is to get hold of a good specialist accountant – they will take on most of the burden for you – or at least point you in the right direction when you’re wondering if you can claim for a Christmas meal!
Golden rules of expenses
It’s worth noting that the way business expenses are treated by the taxman is the same whoever you are – a permie, an umbrella company employee, or a limited company owner.
Now, as a contractor, there are two golden rules I’ve always lived by, which are pretty simple. When it comes to expenses, which are pretty simple
- Firstly, you can only claim for expenses that have been genuinely incurred as a result of your contract duties.
- Secondly, make sure you keep all of your receipts and evidence of expenditure so that your accounts can be compiled accurately.
If you claim for things which are for your personal use (such as health insurance then you will have to pay tax on the value of such benefits (known as ‘benefits in kind’).
In practice, most contractors have only a few expenses to keep track of each month, so with a bit of basic housekeeping, it shouldn’t be too hard to keep accurate records.
What is an ‘allowable expense’?
When your company pays for legitimate business expenses, these costs are deductible against the company’s Corporation Tax bill.
However, some things aren’t tax deductible (typically when there is a personal benefit) – so when people talk about ‘allowable expenses’, they really mean tax-deductible expenses.
Contractors I’ve come across over the years put all sorts of things through their companies – from healthcare costs to car expenses.
But, just because you put something through the company, doesn’t mean you’ll always receive a tax benefit from doing so.
The key thing to remember is that you’ll be taxed on anything which HMRC states are a personal benefit.
If you’re a limited company contractor, you’ll almost certainly take an annual salary. In my case, I pay myself a modest salary, and my wife takes the same amount – for taking care of the company administration and various web marketing tasks.
There are quite a few costs which are business expenses, which are all tax deductible, and pretty straightforward. Your accountant’s monthly fee and other professional costs (such as legal costs for your company) are typical examples. Obviously, I always speak to my accountant if I am ever unsure whether I should or shouldn’t claim something against my company.
Computer equipment expenses
If you’re buying computer equipment for your business, as many contractors do, this is also tax deductible. However, if you’re on the Flat Rate VAT Scheme, you are only entitled to reclaim VAT on capital asset purchases over £2,000.
The key here is to bulk-buy if no single item costs £2,000.
For example, if you were to buy a PC, printer and some software that cost £2,000 or more in total, you can claim back the VAT on the entire bill, but only if they are on the same receipt and not purchased separately.
Professional subscriptions, relevant training courses, business insurances, web hosting, stationary, business cards, are all classic expenses which are frequently claimed back by contractor companies.
If you have children, you might benefit from covering the cost of childcare vouchers via your limited company – weekly costs of around £55 can be covered, without you paying any tax on the benefit.
You may not realise, but you can also put an annual private health check, as well as eye tests, for all your employees, through your company. My last health check cost around £300, but after you work out all the tax considerations (personal and business), by paying for it via my company, it only cost me £150 in real terms.
Pensions remain one of the last remaining tax breaks available to contractors. My company has had an executive pension scheme running for the past 5 years, and all the contributions are allowable against Corporation Tax. I also have an income protection policy which is paid for by the company.
Travel and subsistence
If you need to travel to a temporary workplace, there are standard mileage rates you can reclaim if you’re using your own vehicle (car, motorbike or bicycle), and train and plane tickets can be reclaimed.
Sometimes you may need to pay for hotel accommodation while on business, and reasonable costs can be reclaimed.
You can also reclaim ‘subsistence’ costs when you’re away on business, and meals if you’ve had to travel away from your usual place of work.
There are a few expense areas which require a little more thought, as HMRC’s rules can sometimes seem a bit complicated.
Telephone costs and broadband
If you have a fixed-fee broadband package at home, for example, HMRC won’t take kindly to you claiming a proportion back for your business, as you would have had to pay for the bundle for your home use.
In almost all cases, you’re always best signing a new contract in the company name rather than claiming back a proportion of your residential bills.
Home office costs
If you’re a classic IT contractor who works on a client site almost all of the time, you’re probably best claiming the flat £4 per week allowance HMRC provides without the need for receipts or proofs.
If like me, you actually run an IT business from home, you’d be wise to chat with your accountant about the best way to claim back a proportion of your personal costs to your company.
I have a dedicated office in my house – so, having taken my accountant’s advice, I reclaim a percentage of my mortgage interest and utility bills from my company, based on the square footage of the office compared to the whole house.
So, what about entertainment costs? Although you can still put the costs of legitimate expenses through your company, there is no company tax relief available. However, you could be worse off if you pay for entertaining your clients personally!
So, which business expense do you think attracts more attention than any other, from my experience? The annual party allowance.
I’m not sure why, but perhaps it’s because the thought of claiming for a ‘Christmas party’ is far more interesting than thinking about the next line of code you have to write.
Your company can claim up to around £150 (2013) per head for an annual party. Importantly, you mustn’t claim for a penny more, otherwise, you’ll be taxed on the whole amount!
I’ve mentioned some of the most common expenses contractors come across. The list is by no means exhaustive, so talk to your accountant if you have any questions.
Accounting for your expenses
The key to keeping your accountant happy when it comes to expenses is a) to use whatever recording system they recommend to submit your accounts information, and b) keep all your receipts safe, and keep accurate records of anything you’ve purchased on behalf of your company – however small.
One of the benefits of going through five different accountants in my time as a contractor is that I’ve used a wide variety of different record-keeping systems in action.
My first accountant asked me to stuff any paperwork whatsoever into an A4 envelope each month. For obvious reasons, this method didn’t fill me with much confidence, and on several occasions, things went ‘missing’ in the post. This was in the 1990s, however, before many contractors even had email addresses.
Things have changed a great deal since then, thankfully!
Another accountancy firm I was with for a mere nine months had a fancy bespoke ‘accounting system’ for its clients. You’d enter your expenses online, and upload any scanned expense receipts at the same time. A good idea in principle, but the system simply wasn’t robust enough, and my accounts never reconciled.
My latest (and best) accountant asked me to fill in Excel spreadsheets each month, and to email copies of my receipts via email. This works well – it is simple and effective. So, assuming you’ve chosen an accountant who you can communicate with effectively, the last thing you need to do is keep accurate records.
Of course, however well-meaning us contractors may be, it’s so easy for the odd train ticket, or receipt from PC World to go missing, or simply end up at the back of a drawer.
There are several practical ways to keep tabs on your expenditure and keep all your paperwork safe.
Top tips to keeping track of expenses
- Keep your receipts in a safe place – the ‘old school’ method of keeping receipts in somewhere like a binder works for many
- Print out any electronic receipts you receive via email – forgetting to do this could see you several hundred pounds down each year
- Use an app or software package – these can help record your expenses and may even allow you to scan receipts while on the move
Above all, if you have any questions about what you can claim for, and how to record your company expenses, just ask your accountant. After all, that’s what you’re paying them for!
You may also find SJD’s comprehensive Contractors Guide to Expenses useful or for more information on contractor expenses use the form below to contact a member of our New Business Team.