First, what is a contractor business expense?
If prior to being a contractor, you ever worked for a larger company (probably your motivation for becoming a contractor in the first place) and submitted an expense claim form to your employer, you’ve already got an idea as to what expenses are and what types can be claimed.
In short, a business expense is a charge you incurred in the performance of your job or on behalf of the company. As to what you can claim legitimately, we’ll see shortly. The main benefit of being a contractor and running your own company is in claiming such costs and not having to pay tax on them. In other words, the costs are deducted from your gross profit before tax is applied. At this point, the penny drops for many, as the opportunities to reduce tax appear obvious. However, one has to be very careful, less you attract the attention of HMRC.
The type of expenses as a contractor you can claim also depend on whether you fall under IR35. If you don’t, then the situation is much simpler, as HMRC allows contractors to claim for expenses that are wholly incurred for the purposes of your business.
If you are outside the grasp of IR35 then here are some of the more usual contractor business expenses that can be claimed:
The costs associated with setting up your company. If you incurred expenses prior to setting up your company, you can claim these back too, once the company is formed. This is permissible so long as the expenses were wholly incurred as a legitimate business expense. You can do this for up to seven years prior to your first day of trading with the new company.
The costs associated with an external accountant providing accounting and bookkeeping services.
This is the employers National Insurance Contribution (NIC) and contributions to a pension plan.
Company operational costs:
The basic costs of operating a business include outgoings such as business rent, utilities, internet services, insurance, office costs including postage, consumables and equipment.
The costs of wining and dining clients or potential clients, corporate gifts (to a fixed limit of £50), hosting events or taking clients to events. Care should be exercised here, as the expenditure on such items should be considered on the basis of “what is reasonable” (to HMRC). In simple terms, how much are you spending in relation to your company’s income. Always ensure you keep receipts and can justify the expense from a business perspective.
Personal expenses are a little different to general business expenses. These are claims made in relation to you doing your job. These include:
Reimbursements from the company for getting to where you need to carry out your duties, such as a client’s site. This includes travel costs, such as reimbursement for fuel and over night accommodation. It also includes meal allowances. These are meals that you wouldn’t normally have to purchase, such as those while away from home or your normal office. If you travel by public transport, these are permissible but keep your receipts.
Protective wear / uniform:
If you are required to wear specific clothing while on a client’s site and the client requires you to pay for it, this can be claimed back. Examples would include things like overalls and hard hats, protective boots or gloves. Alas, a business suit is not something you can claim for.
Training / Education:
If there’s one constant in life, it’s change. As our businesses change and the skills we require to maintain our competitiveness in business evolve, periodic training may be required. This is an allowed expense provided the training is wholly in support of your job or necessary as part of a contract.
Under the existing IR35 rules, you can claim a fixed 5% for expenses. You don’t need to be able to prove this, although it is always advisable to keep your receipts. This covers the following basic business expenses:
Do note that this is implemented as a flat rate against gross fees. You can’t just take 5% in cash. Also note that when calculating allowances for corporation tax, the ACTUAL expense figure is used, not a flat 5%. This means that the final figure may be more or less than 5%.
In addition to the basic ‘admin costs’ above, the contractor can also claim for expenses such as computer costs, travel, subsistence, training and hiring other people.
IR35, running a limited company or just running your own business, can be confusing where tax and expenses are concerned. Tax Agility can quickly help you understand what expenses contractors can claim and those they cannot. If you’re working with us, it’s something we can quickly clear up in a short phone call. As contractor accountants, we are here to advise you and reduce the uncertainty associated with all the laws and regulations that apply to those who choose to operate as a contractor.