This article is the official contractor expenses guide from Contractor Advice UK. The advice here applies to UK limited company contractors with regard to what expenses can I claim as a contractor. However, most tips in the article also apply to small and medium business owners. Within this guide, we will look at contracting expenses (UK) and investigate what are business expenses for contractors. We will also investigate what can you expense as a contractor when you are running your own business and what are allowable business expenses (UK) for your company.
When you set up your company for the first time or are already running your own company, a common question arises: What is justifiable as allowable business expenses (UK)? Therefore, this guide will take an excellent in-depth look into UK contractor allowable expenses and what you can claim as your tax-deductible contracting expenses.
Contractor expenses guide -initial thoughts
First of all, per HM Revenue & Customs (HMRC) guidelines, a business expense is a tax-deductible expense where:
`The cost incurred is `wholly, exclusively and necessary for your business.’
The above means that you will incur costs in line with your company’s business engagements and activities. Furthermore, this also means that the limited company expenses you claim should not include any personal element. In contrast, you may incur a personal element with certain costs such as phone or computer use. However, when such amounts are only minor, HMRC will accept this.
Further initial thoughts
In this guide to expenses, generally, when you are in business as a limited company contractor you can claim for any costs or limited company expenses you incur for business purposes. However, when you are claiming expenses as a contractor you should also bear in mind the `wholly, exclusively, and necessary’ test mentioned above for these to count as UK contractor allowable expenses.
When you investigate what can I claim as a business expense, your contractor accountant can guide you here. They will advise what sort of costs you can deduct when you are claiming business expenses (UK). You can check this with them if you are unsure or in doubt.
The limited company expenses along with its income will be shown in the company’s income statement when you prepare the business year-end accounts. You will report the profits on the company tax return and calculate the company’s tax bill on your taxable profits.
The benefits of claiming for your allowable business expenses (UK)
As a limited company contractor, when your company pays for expenses, it will do so through the company bank account. However, as a director, you may also pay for some business costs directly via your personal funds, e.g., a bank account, credit card or cash.
It is essential to highlight, in this IT contractor expenses guide, that when you pay for business expenses personally, two benefits arise because of reclaiming these through your company. Such business expense claims for contractors will have the following benefits for you:
- Your business will receive tax relief on the value of your limited company expenses. When you have a company, it will save Corporation Tax at 19% of the value of your costs against its annual Corporation Tax bill. If you are self-employed, you will save Income Tax at your highest personal tax rate.
- Your company can refund the value of these allowable business expenses so that it reimburses you after paying for the costs.
Contractor expenses guide -processes
Recording your contractor business expenses (UK)
When you incur contractor costs and 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 as 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.
Please read our article that covers tax tips for contractors for some handy advice you should know when you have your own business. This article includes our latest guidance for the best tax planning tips and ideas.
Recharging your business expenditure
You incur the `usual’ running costs when you run your own business. As part of your contract work, you may also be able to recharge your expenses to your client. This area can often confuse business owners, especially regarding how to recharge VAT. Our guide on recharging expenses covers this in more detail.
In addition, if you have paid for any of the costs personally when you recharge expenses, please make sure that you claim these back from your own company, as mentioned earlier.
As mentioned above, you should obtain and retain receipts or invoices for your contractor costs and allowable business expenses wherever you can. When you buy a product or service, you will receive a receipt from a shop, store, or business. Nowadays, some shops and stores also email you a receipt to save on paper.
When you purchase 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’s name rather than your personal name. Please note that this is important as it shows that the product or service cost is for the company.
Contractor expenses guide -what else to consider in terms of business costs
Duality of purpose
As a business owner, you need to be aware of any expense with a `duality of purpose.’ As part of this contractor expenses guide, please note HMRC use this term where there is both a business and a personal element as part of 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 sorts of contractor business expenses (UK) can you claim?
The types of tax-deductible limited company expenses can range across lots of different categories. They will also differ depending on which industry you are in and which service you are providing.
As mentioned earlier, you can pay your contractor costs and allowable business expenses by the company bank account or with your personal funds. You should record any that you pay yourself so the company can reimburse you for these.
It may also be worth you considering registering for VAT. Recently, the VAT Flat Rate Scheme (a sub-scheme of VAT registration) was a more tax advantageous scheme. However, nowadays, the `normal’ VAT scheme is better for most contractors. Under this, you will be able to reclaim the VAT on all of your costs.
Contractor expenses guide -the types/categories of what counts as a business expense
Claiming travel expenses as a contractor for your business trips
HMRC guidelines state that you can only claim travelling-type costs as tax-deductible expenses when visiting a temporary workplace. The word temporary is not so well defined; however, there is something called the 24-month rule, which explains how HMRC treat a `temporary workplace’.
As part of your day-to-day work, you will incur contractor travel expenses when you visit your primary worksite or even different client sites. You may also incur business travel costs when you travel to other locations for business reasons. Such costs could include when you go to interviews or visit the bank or accountant. Extra travel costs could also be when you attend training courses and seminars or travel to buy company supplies.
The types of travelling expenses
Within your contracting expenses, the types of costs that you may incur will include:
- Personal Incidental Expenses when you stay away from home overnight for work reasons. These are also known as PIEs. The rate you can claim is £5 per night in the UK and £10 per night outside the UK. HMRC sets this rate at a level to cover sundry types of costs. These will effectively cover phone calls home, coffees, laundry, newspapers etc., which are personal costs, but PIEs allow you to make a claim to cover all or part of these. *
Motor vehicle/bike expenses
If you use your car or motor vehicle for business reasons, you will incur allowable business expenses, and your business can claim:
- Mileage allowances for business journeys in your private car. HMRC sets the rates that you can claim for business mileage, 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 travelled after that. *
- You can claim mileage allowances for travel via your private motorbike or bicycle. The rates 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, all travelling and motor expenses are subject to the `24-month rule.’
Contractor expenses guide -salary expenses
Salaries above a certain level incur tax and National Insurance. Your company’s business expenditure include the total wages, tax/NI costs, and salary-related expenses, such as pensions. As a result, these will help reduce company tax. The salary costs may include:
- Employer’s NI payments on any wages above the NI threshold.
- Staff pension schemes. Under auto-enrolment, employers now need to ask their employees who earn above a certain amount if they would like to join this. If they do join, both the employee and employer will pay into the pension scheme that the government organises.
Phone bills and broadband charges
You will likely incur phone and broadband costs while running your business. These contracting expenses will consist of:
- Business calls on your home phone.
- Mobile phone costs related to business use.
- Broadband charges for business internet use.
Contractor expenses guide -office expenses
Your company may incur office-type costs as allowable business expenses. These may include:
- Business premises costs. If you pay rent for business premises, you can claim for this. However, most contractors do not have separate business premises. Therefore, if you do not have separate premises, you can claim for the use of the home as an office which we explain below.
- Postages and stationery, business cards.
- Use of home as office allowance when you work from home. Under HMRC’s present allowed rates, you can now claim for £6 per week. You may be able to claim for more than this in some cases. If you claim more, you need to show that your extra household expenses cost more per week due to running your business from home.
If you have a company computer, you may incur contracting expenses when you use this.
These costs may comprise:
- An annual eye test and the cost of basic glasses if you require these when you are working.
- 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. Such contracting expenses could consist of:
- Local business sponsorship, if it can benefit your business.
- The cost of a professional update of your CV, 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. Such training and subscriptions will include:
- Magazine and newspaper subscriptions, if these relate to your work.
Taking out insurance may be necessary for your business and may also be a requirement of your client(s). If you pay for business insurance costs, they will be tax-deductible limited company expenses. Usually, your contract will state which insurances you need to take out.
Within your contractor finances, the types of insurance policies that you may require are:
- Business insurance, such as Employers and public liability insurance, may be required, too, in some cases.
Other financial policies
Other products, which you may wish to consider as part of your overall contractor finances, will include:
- Relevant Life insurance. Can I claim life insurance as a business expense (UK)? When you take out a Relevant Life Insurance policy it can be as much as 50% cheaper when you pay via your company compared to you paying for this cost personally.
- Income protection insurance. 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 respect of this. You may also, from time to time, incur legal charges for your company. These are both genuine business costs, and they include:
- Accountancy fees. Typically, a monthly payment, plus any one-off fees.
- Legal and other professional fees which are related to business issues.
Contractor expenses guide -other business expenditure
Your company may incur many other costs, which you can claim as business expenses for contractors. 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. You can also claim to entertain employees; however, this falls under the annual event allowance (see below). Please note that although entertaining expenses are not tax-deductible, it is better if your business pays for them rather than paying for them yourself.
- Bank charges and interest that you incur on your business bank account.
- The annual £13 fee 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 with Companies House do not incur a fee, but a few changes do incur a fee, such as when you change the company name and one or two others.
- Trivial Benefits -these cannot be more than £50 each time. Only directors and employees of a `close company’ can claim these. The amount that you can claim is £300 per year for each director and employee.
- Business clothing -when are clothes for work tax-deductible? You will only receive tax relief for certain items of clothing therefore please read the guide on this to see what is covered. Basically, you are only allowed to claim if the dress is part of a uniform or is protective clothing for your work.
Contractor expenses guide -further contracting expenses
- Business gifts -you can claim up to £50 for each gift, but these are also 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 and 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 in tax-deductible expenses, but these costs are subject to certain conditions.
- Depreciation -this amount is the value of an asset you write off as an expense.
Can you claim glasses as a business expense (UK)?
If you need to wear glasses for work, your business can pay for your eye tests each time you go for one. In addition, your company can also pay for basic glasses however not the designer type which will be more expensive.
Contractor expenses guide -some other not-so-well-known expenses
Two other allowable business expenses (UK) that are not well known are:
- As a contractor, you can claim for an annual health check-up for yourself. This will be fully tax deductible however it only applies to the actual check-up itself and not any surgery costs.
- If the need arises you can also claim for counselling fees if you have mental health type issues. This does not include issues arises for the use of alcohol or drugs and other self-inflicted issues.
Contractor expenses guide -simplified expenses
Simplified expenses are an option that can be used by:
- Business partnerships that have no companies as partners.
There is more information on the HMRC website regarding this if you fall into the above worker category.
The expenses that you pay for personally, as well as the expenses that your company pays directly, will reduce the taxable profit of your company or self-employed business. Therefore, it is essential to claim all of your genuine business expenditures. In turn, this will result in a lower tax charge for your business, and when you come to pay tax, the amount due will be less than it would have otherwise been.
This contractor expenses guide includes almost all types of allowable and tax-deductible business expenses that you may come across.
Depending on your type of business, there may be other types of limited company expenses that you can claim. You can claim any costs or expenses you incur while running and operating your business.
As mentioned, you should note any expenses you incur when operating your business. You should also obtain an invoice or receipt each time you incur a cost for your business. Your contractor accountant can guide you if you are ever unsure.
As a final note, we have written many articles on most of the expenses that are listed above. Please look at these for more detailed information on what you can claim. Our articles also cover any rules you need to know as a contractor or small business owner.
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