Expenses for limited company contractors who are new to the world of self employment can appear challenging; what can you claim for, how should you manage your receipts?
As a permanent employee, claiming expenses is typically a fairly simple process. You might pay for things like travel to a client, taxis, or buying software with your company credit card, or use your own money (depending on the set up) and then claim it back.
Most large companies have expense 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 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.
Most contractors have relatively simple accounting needs, with perhaps 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 software purchases, or replenishing the stationery cupboard).
You will likely only spend a few hours every few months to keep your 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.
We discuss the most popular queries surrounding claiming expenses below:
1) Tax deductible expenses
2) Self employed allowable expenses
3) Business software expenses
4) Travel and subsistence expenses
5) HMRCs limited company expense rules
6) Online business expenses
7) Home office costs
8) Keeping track of business expenses
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Company Expenses: The golden rules
It’s worth noting that the way business expenses are treated by the taxman is the same whoever you are – a permanent employee, an umbrella company employee, or a limited company owner.
In contracting, there are two golden rules to maintain.
- Only claim for expenses that have been genuinely incurred as a result of your contract duties.
- 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 only have a few expenses to keep track of each month. With a bit of basic housekeeping, it shouldn’t be too hard to keep accurate records.
What is an ‘allowable expense’?
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 often try to 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.
Self employed allowable expenses list
If you’re a limited company contractor, you’ll almost certainly take an annual salary.
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.
Always speak to your accountant if you are unsure whether you should or shouldn’t claim something against your company.
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Contractor business software and 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, stationery, business cards, are all classic expenses which are frequently claimed back by contractor companies.
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. With the average health check costing around £300, after you work out all the tax considerations (personal and business), by paying for it via your company, it only costs you around £150 in real terms.
Pensions remain one of the last remaining tax breaks available to contractors. With executive pension schemes, all the contributions are allowable against Corporation Tax. It's also advisable to have an income protection policy, which can be 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). Train and plane tickets can also 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.
Limited company expenses: HMRCs rules on non-typical expenses
There are a few expense areas which require a little more thought, as HMRC’s rules can sometimes seem a bit complicated.
Online expenses - 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 best signing a new contract in the company name rather than claiming back a proportion of your residential bills.
Business expenses - home office costs
If you’re a classic IT contractor who works on a client site most of the time, you’re probably best claiming the flat £4 per week allowance HMRC provides without the need for receipts or proofs.
If you 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.
For example, having a dedicated office in your house means you can reclaim a percentage of your mortgage interest and utility bills from your company, based on the square footage of the office compared to the whole house.
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.
The annual party allowance attracts the most attention of all entertainment costs.
Your company can claim up to £150 (2019) per head for an annual party. Be careful not to claim for a penny more than this amount, otherwise, you’ll be taxed on the whole amount.
This list is by no means exhaustive, always speak 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.
Accountants may use a few different record-keeping systems.
Some firms use a bespoke ‘accounting system’ for their clients. You enter your expenses online, and upload any scanned expense receipts at the same time. A good idea in principle, but the system may not always be robust enough.
Other accountants will have you fill in Excel spreadsheets each month, and email copies of your receipts. This works well – it is simple and effective. Assuming you’ve chosen an accountant who you can communicate with effectively, the last thing you need to do is keep accurate records.
No matter how meticulous you may be in keeping tabs of your expenses, it does happen that 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 business 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
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