Contractor expenses guide

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Contractor expenses guide -introduction 

This is the official contractor expenses guide from Contractor Advice UK. The advice here applies to UK limited company contractors; however, most also apply to small and medium business owners.

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? Therefore, this expenses guide will take an excellent in-depth look into what you can claim as tax-deductible contractor expenses.

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 the cost in line with your company’s business engagements and activities. This also means that the 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

Generally, when you are in business as a limited company contractor you can claim for any costs or expenses you incur for business purposes. However, you should also bear in mind the `wholly, exclusively, and necessary’ test mentioned above.

Your contractor accountant can guide you regarding what sort of costs you can deduct when you claim expenses. You can check this with them if you are unsure or in doubt.

The income and costs will be shown in the company’s income statement when the business year-end accounts are prepared. The profits are then reported on the company tax return, and the company’s tax bill will be based on the taxable profits.

The benefits of claiming for your allowable business expenses 

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 expenses directly via your personal funds, e.g., a bank account, credit card or cash.

It is essential to highlight, in this contractor expenses guide, that when you pay for business expenses personally, two benefits arise as a result of reclaiming these through your company:

  • Your business will receive tax relief on the value of the expenses. When you have a company, it will save Corporation Tax at 19% of the value of your expenses 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 expenses so that you are reimbursed after paying for the costs.

Processes 

Recording your business 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 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 includes our latest guidance for the best tax planning tips and ideas.

Recharging your business expenses 

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, when you recharge expenses, if you have paid for any of these personally, please make sure that you claim these back from your own company, as mentioned earlier.

Keeping receipts 

As mentioned above, you should obtain and retain receipts or invoices for 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. This is important as it shows that the product or service cost is for the company.

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 business expenses can you claim? 

The types of tax-deductible 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, the business expenses can be paid by the company bank account or your personal funds. You should record any that you pay yourself so the company can reimburse you for these.

VAT 

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 business expenses 

Claiming for travel expenses for 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 business expenses of a travelling nature 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

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 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 in 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.’

Salary expenses 

Salaries above a certain level incur tax and National Insurance. Your company’s business expenses 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 are now required to ask 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 costs will consist of:

  • Business calls on your home phone.
  • Mobile phone costs related to business use.
  • Broadband charges for business internet use.

Office expenses 

Your company may incur office-type costs as 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.
  • Printing costs.
  • 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.

Computer expenses 

If you have a company computer, you may incur business costs 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 at work.
  • Business software for your work.
  • Technical books and journals that relate to the work that you do.

Advertising expenses 

Advertising expenses might be necessary when you promote your business. Such costs 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.

Insurance costs 

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 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 products, which you may wish to consider as part of your overall contractor finances, will include:

  • Relevant Life insurance. This policy 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 relation to this. You may also, from time to time, incur legal charges for your company. These are both genuine business expenses, 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. 

Other business expenses 

Your company may incur many other costs, which can be claimed as 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. 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 -you are only allowed to claim if the dress is part of a uniform or is protective clothing for your work.
  • Business gifts -you can claim up to £50 for each gift, but these are also subject to certain conditions.

Further business expenses

  • 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 is the value of an asset that is written off as an expense.

Simplified expenses 

Simplified expenses are an option that can be used by:

  • Sole traders.
  • 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.

Tax savings

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. 

Final thoughts 

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 expenses that you can claim. You can claim any costs or expenses you incur as part of 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.

Link to Contractor Advice UK group on

LinkedIn    https://www.linkedin.com/groups/4660081/

Published On: August 1st, 2022 / Categories: Contractor Tips, Expenses, Main Guides, Most Read Articles, Tax Saving Guides /

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