First of all, per HM Revenue & Customs (HMRC) guidelines, a business expense is allowable where:
the cost incurred is `wholly, exclusively and necessary’ for your business
What’s more, this means that you will incur the cost directly in line with your company’s business engagements. The above also means that this should not include any personal element. In contrast, with certain expenses such as phone or computer use, you may incur a personal element. As a result, when such amounts are only minor, HMRC will accept this.
Your contractor accountant can guide you with regards to what you are able to claim. If you are ever unsure you can check this with them.
Benefits of claiming for your business expenses
There are also two benefits to reclaiming expenses that you pay for out of your own pocket:
- Your company saves tax at 19% on these against its annual Corporation Tax bill
- Your company can refund these to you so that you are reimbursed after paying for these costs
Recording your expenses
When you incur business expenses as part of your daily work, you should record these. Key to note, you will need to do this on an ongoing basis. Also, you can collect this data in the form of a receipt or invoice and record it in your accounts system. What’s more, if you use an online accounting system such as Freeagent, you can take photos of the receipts and store these online.
Have a read of my article covering tax tips for contractors for handy tips you should know when you have your own business (this is a member only article and you can read it if you sign up as a member). This includes my latest advice for best tax planning ideas.
Recharging your expenses
When you run your own business, you will incur the `usual’ running costs. As part of your contract work, you may also be able to recharge your expenses to your client. Please note, this is one area that can often confuse business owners. Therefore, when you recharge expenses, please note you need to make sure that you claim these back as business expenses from your own company.
Keep your receipts
As mentioned above, you should obtain and retain receipts or invoices for business expenses wherever you can. You can obtain this when you buy a product or service from a shop, store, or business. When you buy something online, you might receive this via email, or you can download it from the website where you buy this. Finally, invoices or receipts should be in your business’ name rather than in your name.
What else to consider
Duality of purpose
As a business owner, you need to be aware of any expense that has a `duality of purpose.’ HMRC use this term where there is both a business and a personal element to a cost. Such an expense could include a trip abroad which is part business and part holiday. When there is any suspicion from HMRC that the expense may not have occurred if it were not for the personal element, they could disallow it.
What can you claim
The types of business expenses can range across lots of different categories. They can also be paid by either the company bank account or your personal funds e.g. personal bank account, personal credit card or personal cash. The important thing is to ensure sure that you claim for all of them! Therefore, I have drawn up a detailed list below.
It may also be worth you considering registering for VAT. In recent times, the VAT Flat Rate scheme (this is a sub-scheme of VAT registration) was more tax advantageous however, now, the `normal’ VAT scheme is better for most contractors. Under this, you will be able to reclaim the VAT on your costs.
The types / category of expenses
Your company will incur business expenses of a travelling type nature when you visit your main worksite or different client sites. You may also incur these when you travel to other locations for business reasons. Such costs could include when you go to interviews or perhaps when you visit the bank or accountant. Also, this could be when you attend training courses and seminars or make trips to buy company supplies. The types of costs that you may incur will include:
- Business travel and the costs for overnights stays. These costs can include hotels or B&B’s. It may even include a temporary rented house or flat and the various house running costs such as gas, electric, etc. ***
- Business meals and subsistence while you are working away ***
- Personal Incidental Expenses when you are staying away from home overnight for work reasons. These are also known as PIEs. The rate that you can claim is £5 per night in the UK and £10 per night outside the UK. This rate is set by HMRC at a level to cover sundry type costs. These will include phone calls home, coffees, laundry, newspapers, etc. ***
Motor vehicle / bike expenses
If you use your personal car or motor vehicle for business reasons, you will incur business expenses in relation to this. Your business can claim:
- Mileage allowances for business journeys in your private car. HMRC sets the rates that you can claim, and these are 45 pence per mile for the first 10,000 business miles travelled in a tax year and 25 pence per mile for each mile after that.
- You can claim for mileage for travel in your private motorbike or bicycle. The rates that you can claim are 24 pence per mile for a motorbike and 20 pence per mile for a bicycle ***
- Motoring expenses using fixed-rate allowances (e.g., claim for the distance travelled)
*** Please note travelling and motor expenses are subject to the `two-year rule.’
Salaries are also business expenses and your company may pay salaries and costs related to this. These may include:
- A salary for you as the contractor and wages for all business staff. The staff will usually be you and perhaps your spouse
- Company pension scheme contributions
- Employer’s NI payments, on any wages above the NI threshold
Telephone and broadband charges
As part of your business, you are likely to incur phone and broadband costs. These costs will consist of:
- Business calls on your home phone
- Mobile phone costs related to business use
- Broadband charges for business internet use
Your company may incur office type costs as business expenses. These may include:
- Postages and stationery, business cards
- Printing costs
- Use of home as office. Under HMRC’s present allowed rates, you can claim for £4 per week. You may be able to claim for more than this in some cases. If you claim for more, you need to show that your extra household expenses cost more per week as a result of running your business from home.
If you have a company computer, you may incur costs with the use of this. These costs may comprise of:
- An annual eye test and the cost of basic glasses, if you require these when you are at work
- Computer and other equipment purchased for the business. Such equipment could include desktops, laptops and other types of office equipment
- Business software for your work
- Technical books and journals that relate to the work that you do
Advertising expenses might be necessary when you promote your business. If these are genuine business expenses they could consist of:
- Advertising and marketing for your business
- The cost to set up and run a business website
- Local business sponsorship if it can benefit your business
- The cost of a professional update of your CV and LinkedIn profile and other social media adverts
Training and subscriptions
From time to time, you may need to take training courses that relate to your work. Your company may also pay for professional subscriptions. These will include:
- Professional training courses, if these relate to the work that you do
- Certain professional subscriptions to professional bodies that represent your area of work
- Magazine and newspaper subscriptions, if these relate to your work
Taking out insurance may be necessary for your business and if this is the costs will be business expenses. Normally, your contract will state which insurances you need to take out. The types of policies that you may require are:
- Business insurance, such as professional indemnity insurance. Employers and public liability insurance may be required, too, in some cases.
- Relevant Life insurance. This policy can be as much as 50% cheaper when you pay via your company compared to you paying for this personally.
- Income protection. This policy will provide you with an income if you cannot perform your contract work for some time.
Accountancy and legal costs
While you run your own business, you will incur accountancy costs in relation to this. You may also, from time to time, incur legal costs for your company. These are both business expenses, and they include:
- Accountancy fees. Normally, a monthly payment plus any one-off fees
- Legal and other professional fees which are related to business issues
There may be many other types of costs that your company incurs and are genuine business expenses. These might consist of:
- Entertaining costs -these can be for the entertaining of past, present, or potential future clients. These costs are not tax-deductible. Certainly, though, it is better if your business pays for these rather than you pay for them yourself.
- Bank charges and interest that you incur on the business bank account.
- The annual £13 fee that you pay to Companies House when your business files the Confirmation Statement each year. Any other Companies House fees that you incur when you make specific changes. Most changes do not incur a fee, but a few do, such as when you change the company name and one or two others.
- Trivial Benefits -these cannot be more than £50 each time. Please note only directors and employees of `close companies’ can claim these. The amount that you can claim is £300 per year for each director and employee.
- Business clothing -you are only allowed to claim here if the clothing is part of a uniform or is protective clothing for your work
- Business gifts -you can claim for up to £50 for each gift, but these are subject to certain conditions.
- An annual event -the outing can be a meal out or a similar excursion. It may include your annual Christmas dinner as well as other events throughout the year. The available claim is up to £150 per employee per year.
- Relocation costs -you can claim up to £8,000, but this is subject to certain conditions.
- Any company formation costs.
- Charitable company donations -these, too, are subject to certain conditions.
- Depreciation -this is the value of an asset that is written off as an expense.
The list above includes most types of business expenses that you may come across. However, there may be some that I have missed. Depending on your type of business, there may be other types of expenses that you can claim.
As mentioned, you should take note of any expenses that you incur when you run your own business. You should also obtain an invoice or receipt each time you commit a cost for your business. Your contractor accountant can guide you if you are ever unsure.
As a final note, I have written many articles on most of the expenses that are listed above. Please have a look at these for more detailed reads on what you can actually claim. My articles also cover any rules that you need to be aware of as a contractor or small business owner.
Link to Contractor Advice UK group on LinkedIn https://www.linkedin.com/groups/4660081/