Expenses and Tax

When contracting you will most probably incur expenses, these are paid from your own money and then you can reimburse them back from your Limited company. You do this through either a transfer from your business bank account or writing a cheque from your business account to yourself. Just make sure you keep the receipt for the expense as HM Revenue and Customs (HMRC) may ask you for it.

Expenses can be complicated so it’s recommended you speak to your contractor accountant.

However the below should give you a basic understanding of expenses.

Expenses don’t attract tax. Say your contract is worth £5,000 a month, you didn’t have any expenses and you withdrew all of the £5,000 you would have to pay tax on the full £5,000.

Though say you had £1,000 of expenses you would now only pay tax on £4,000. This is where ideally you need to speak to an accountant as expenses could affect your PAYE salary, dividends and whether or not you’re on the flat rate VAT scheme, although to summarise taking expenses mean you pay less tax.

What expenses can I claim?

On the HMRC’s website there is a guide of well over 100 pages explaining what expenses you can take. However the reality is if your contract is outside of IR35, HRMC rules state that expenses can be claimed if they are wholly and exclusively for the purpose of your business.

For example you could claim for: accountancy fees, business travel and accommodation, postage, stationary, mobile phone calls, insurance and business entertainment to name a few. The main expenses you’re likely to claim for are explained in more detail below:

• Meal Allowance - Daily meals cannot be claimed as expenses, though you can claim for reasonable meal costs when you’re working away from your normal place of work or when you are staying away overnight.
• Travel Expenses – If you are travelling to a temporary place of work you can claim mileage as both a driver and a passenger. Mileage is claimed back by the mile and covers fuel and running costs. As a driver for the first 10,000 miles in any fiscal year you can claim 45p per mile and then 25p per mile thereafter. As a passenger you can claim 5p per mile. Also you can claim 24p a mile for motorcycles and 20p per mile for bicycles. Parking and congestion charges can be claimed back too though you can’t claim back any parking fines or speeding tickets.
• Accommodation- If you need to stay overnight, the cost of a hotel or bed and breakfast can be claimed back. Whilst there is no set amount to how much can be claimed however they do need to be reasonable, so perhaps a £600 a night room at The Savoy isn’t the best idea!
• Clothing – You could claim any special work wear you may need to complete your job, say a lab coat. However everyday work clothing is not a valid expense.
• Training – If you have to go on a training course for your current contract to perform your duties then you can claim this through your company. The training has to be relevant to your current contract to claim expenses.
• Pensions – You can choose to invest some of your income into a Company pension scheme. Pensions are very attractive for contractors as they are one of the last tax breaks available. If you invest some of your income into a pension you will save on income tax and your employers and employees national insurance. The amount of tax relief can vary, though it could be up to 48% meaning that for each £100 you invest you pay £52 and the tax man pays the rest.

If your contract is inside IR35 you can still claim expenses up to 5% of your contract value. The expenses you can claim are: travel and accommodation expenses, pension contributions and certain professional subscriptions.

Whether your contract is inside or outside IR35 you need to keep your receipts. You cannot claim for expenses if you don’t have proof you paid in the first place.

This is just a very brief overview of Contractor expenses kindly provided by SJD Accountancy