Many contractors assume that claiming expenses is time consuming and complicated, but it does not have to be. By understanding HMRCs laws and following a few easy guidelines, you can ensure that your business is maximising its tax benefits. This guide will empower you with the knowledge necessary to understand what you may claim, how expenses affect your tax bill, and the critical nature of maintaining relevant records.
What constitutes a business expense?
A business expense is anything you acquire that is deemed necessary for the operation of your firm on a daily basis. This could include travel costs, phone and internet bills, and possibly a share of your utility bills when you work from home.
HMRC’s rules on business expenses
HMRCs guidelines are simple and clear: a business expense must be required, entirely and exclusively incurred in the course of business operations. While this appears straightforward, what does it truly mean for you as a contractor? When it comes to tax efficiencies and how HMRC perceives an expense, there are two classifications, and each is regarded and recorded separately in your financial statements and tax returns at year-end.
The majority of expenses fall within the first category, which is tax deductible. These include business travel, information technology equipment, and services such as accounting and web hosting. Tax deductible expenses are deducted from business profits, lowering your tax payment. The second classification is non-deductible expenses. This kind of expense is not deductible from year-end profits and hence has no effect on the tax bill of the company. Personal expenses, like dry cleaning and grocery shopping, should not be included in your expense report. By incorporating personal expenses, many businesses have exposed themselves to investigation and penalties from HMRC.
What expenses can you claim?
Weve compiled a list of expenses a contractor can claim, including –
Travel expenses– If you travel by public transport to meet a customer or work at a temporary location (e.g., your clients office), simply retain the receipt to reimburse or claim your travel fare. Claiming mileage in a personal car is slightly more complicated because it is calculated on the basis of the number of kilometres travelled rather than a fixed rate.For mileage, HMRC publishes a fixed rate for mileage that you can claim tax-free –
- 45p per mile for the first 10,000 miles per year,
- After 10,000 miles, 25P per mile.
The mileage allowance is intended to cover the cost of operating the vehicle and the cost of fuel. Cycling to your clients location? You can also claim mileage on your bicycle (20p per mile). Mileage claims quickly accumulate, and claiming for any work-related travel can significantly reduce your tax liability - just be sure to keep track of your mileage after each trip.
Accommodations– When working away from home, you can deduct the reasonable expense of temporary housing (e.g. hotel, bed and breakfast, or rental lodging). This must be reasonable (no £1,000-per-night spa hotels), and you must have permanent residency in another country.Additionally, you can claim a £5 daily incidental allowance (£10 if working abroad) to cover the cost of telephone calls, newspapers, and laundry.
Food and drink– When working in a temporary location, you may deduct the expense of food and beverages (subsistence). You may be able to claim a reasonable amount for the expense, depending on the length of time spent travelling and working.From April 2016, the laws governing benchmark scale rates required a number of conditions to be met by one-man and small businesses, including independent verification of expenses.As a result, it is now far easier to deduct the receipted amount as an expense. You should retain receipts for any claims as requested by HMRC.
Usage of home as an office– As a contractor, your permanent place of business is almost always your house, and you may be eligible to claim an allowance when using your home as an office. How much you can claim is determined by how much time you spend working from home. We propose the HMRC weekly allowance of £6 (when you work for more than 50 hours per month), please contact dns accountants to see whether you may claim more.
Accountancy fees– Monthly accounting fees are deductible expenses.
Internet– A separate internet connection is deductible if the contract is in the companys name and is essential for commercial purposes.
Mobile phone charges– If you have a mobile phone and are using it for personal purposes, you can claim only the cost of the indicated business calls. However, if you are in the market for a new phone, it is worth considering putting the contract in your companys name, since the entire cost would be tax deductible.
Training– Training is an allowed expense if it is used to update or enhance an existing skill. However, training in a totally new skill is not. For example, an update course in a programming language’s new version is an allowed expense for a computer programmer, while training to be a driving coach is not.
Donations to charities– Donations to a registered charity are usually permissible as long as they do not result in a loss for the company.
Entertainment for business– You may claim reasonable costs associated with entertaining clients through your business, but these costs are not tax deductible.
Childcare expenses– Your limited company may provide you with vouchers redeemable at registered childcare providers.
Staff entertainment– Annual events (e.g., summer BBQ’s or Christmas parties) may cost up to £150 (including VAT) per employee, plus an additional £150 for directors. Bear in mind, however, that if you spend more than £150 per person, the entire expenditure becomes disallowable.
Pension contributions– Pension contributions given by a firm to its directors and employees are an allowable expense. There are annual limits on how much an employee may receive in pension contributions, and we recommend speaking with a financial expert if you are considering pension contributions.
Insurance for Professional Indemnity, Employers’ Liability, and Public Liability– Employers are legally required to carry employers’ liability insurance, and many agencies also demand Professional Indemnity coverage. These are all allowable company expenses.
Computer equipment– You may deduct the cost of computer equipment purchased for business purposes. This is entirely deductible on a tax basis as long as any personal use is coincidental. VAT on input can be recovered even if you are utilising the Flat Rate VAT scheme on purchases of computer equipment exceeding £2,000 (and other capital assets).
- Expenses related to marketing and advertising.
- Design, maintenance and hosting of the website.
- Costs associated with subcontractors.
- Supplies for postage and stationery.
- Trade journals, books, and magazines.
- Certain subscriptions for professionals.
- Computer software.
Receipts must be retained for any expenses claimed, as HMRC may request verification that the expense was actually incurred. Generally, you should retain this for six years, as HMRC investigations can go back six years. If you are unable to demonstrate that the cost was incurred, HMRC may regard this as tax evasion, and you may be required to pay tax on these expenses.
For these reasons, it is critical that you seek assistance from a dns expert who is knowledgeable about the expenses you can claim and save yourself from hefty fines and penalties.
If you have any questions regarding contractor expenses, please speak to one of our dns experts right now on 03330 886 686, or you can also e-mail us at firstname.lastname@example.org.
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