Business expenses guide for contractors

Contractor expenses guide -introduction?

This is the official contractor expenses guide from Contractor Advice UK. The advice in here applies to UK limited company contractors however much of it also applies to small and medium business owners too.

When you?set up your company?for the first time, or are already?running your own company, a common question that arises is what is justifiable as allowable business expenses? Therefore, this expenses guide will take a good in-depth look into what you can claim as tax-deductible business 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 directly in line with your company’s business engagements and activities. This also means that the expenses that you claim for should not include any personal element. In contrast, with certain expenses such as phone or computer use, you may incur a personal element. However, when such amounts are only minor, HMRC will accept this.

Further initial thoughts

As a general rule, your business can claim for any costs or expenses that 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 with regards to what sort of costs you can deduct, when you claim expenses. If you are ever unsure or in doubt you can check this with them.?

When the business year end accounts are prepared, the income and costs will be shown in the company’s income statement. 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?

When your company pays for expenses, it will do so through the company bank account but as a director you may also pay for some business expenses directly via your own personal funds e.g., personal bank account, personal credit card or your own cash.

It is important to highlight, in this contractor expenses guide, when you pay for business expenses out of your own personal funds, there are two benefits 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 to you 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 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.

Please have a read of our article that covers?tax tips for contractors?for some handy advice that you should know when you have your own business.?This includes our latest advice for best tax planning tips and ideas.

Recharging your business expenses?

When you run your own business, you will?incur the `usual’ running costs day to day. 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 especially in terms of 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 yourself, 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. 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 personal name.

What else to consider?in terms of business costs?

Duality of purpose?

As a business owner, you need to be aware of any expense that has 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.

The business expenses can be paid by either the?company bank account?or your personal funds as mentioned earlier and it is important that you record any that you pay yourself so that the company can reimburse you for these.

VAT?

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 scheme to use. ?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 for travelling type costs as a tax deductible expenses, when you are visiting a temporary workplace. The word temporary is no 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 type nature when you visit your main 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 perhaps when you visit the bank or accountant. Extra travel costs could also be when you attend training courses and seminars or make trips to buy company supplies.

The types of travelling expenses

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. There are also some HMRC standard meal allowances available and our business meals article explains this in more detail. *
• 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 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 personal car or motor vehicle for business reasons, you will incur 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 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 for mileage allowances 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, all travelling and motor expenses are subject to the?`24 month rule.’?

Salary expenses?

Salaries above a certain level incur tax and National Insurance. The total of salaries and tax/NI costs, as well as salary related expenses such as pensions, are included as part of your company’s business expenses and as a result, these help to reduce company tax. The salary costs 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.
• 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 is organised by the government.

Phone bills 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.

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. If you do not have separate premises, you will be able to claim for use of home as 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 for more, you need to be able to show that your extra household expenses cost more per week as a result of running your business from home.

Computer expenses?

If you have a company computer, you may incur business costs when you 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 computer equipment or office equipment.
• 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:

• 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. Such training and subscriptions will include:

• Professional training courses, if these relate to the work that you do.
• Certain?professional subscriptions?to professional bodies and organisations that represent and support your area of work.
• Magazine and newspaper subscriptions, if these relate to your work.

Insurance costs?

Taking out insurance may be necessary for your business and it may also be a requirement of your client(s). If you pay for business insurance costs, they will be genuine expenses. Normally, your contract will state which insurances you need to take out. The types of policies that you may require are:

• Professional indemnity insurance.
• Business insurance, such as?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 cost personally.
• Income protection insurance. This policy will provide you with an income, if you are unable to 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 genuine 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.?

Other business expenses?

There may be many other types of costs that your company incurs 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 for entertaining employees, however this falls under the annual event allowance (see below). 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 your 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 with Companies House do not incur a fee, but a few do charge, 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 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 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 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 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 in tax-deductible expenses, but these costs are subject to certain conditions.
• Any?company formation costs.
• Charitable company donations?-these, too, are subject to certain conditions.
• Pension contributions to a company pension scheme.
• 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 category of worker.

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 important to claim for all of your genuine business expenditure. 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. Basically, you can claim for any costs or expenses that you incur as part of running and operating your business.

As mentioned, you should take note of any expenses that you incur when operating your own 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 have a look at these for more detailed information on what you can actually claim. Our articles also cover any rules that you need to be aware of as a contractor or small business owner.

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