A major part of your finances when you’re a freelance contractor is claiming expenses. Doing so ensures you don’t get hit with a major tax bill, making sure you’re compensated fairly for the costs you’ll incur running your own business. However, when you first start up, the concept of claiming can seem daunting.
Luckily, here at Brookson, we know what we’re talking about when it comes to expenses. We’ve even produced a free guide on the subject, which you can download here. But for a quick overview on what expenses you can claim, and how to do so, all you need to do is read on.
What can you claim?
The simple answer is that you can claim any business expenses on your tax return. But what exactly is a business expense? According to HMRC, it’s any cost that has been incurred “wholly and exclusively” for the purposes of your business. This is quite a broad definition, of course.
Before we get into what counts as a business expense, it’s important to note that you have to be outside IR35 to claim these. If you are inside IR35 you will count as an employee and won’t be able to claim anything back from HMRC, although you might be able to get reimbursed for certain costs from your client.
If you’re outside IR35, there are plenty of valid costs you can claim on your tax return. For example, any meals you purchase while you’re working away from your normal workplace can be claimed, including evening and morning meals if you have to stay overnight for the job. If you are working out of a different workplace than normal, you can claim the travel costs to get there and back, as well as the accommodation if you have to stay overnight.
Then there are the more surprising things you can claim, such as clothing. You can’t claim for your ordinary work clothes, but if you need to wear something to complete a job – like protective gear, for example, or a set uniform – you can recoup the costs through your expenses.
You can also claim for any training you need to undertake in order to complete a contract, although general skills development wouldn’t count as a valid expense. If you work from home, you can also claim a portion of your electricity bill back for the time you spend there on the job.
How do you claim expenses?
To claim, you simply have to add up the relevant expenses and put the complete figure on your tax return. Of course, this means keeping a detailed track of your finances, and keeping hold of receipts and any other relevant documentation so you can double-check your figures when the time comes to total everything up.
While neither your accountant nor HMRC will need to see those receipts in order to claim, you still need to keep hold of them. If you were to get audited, HMRC may want to check every one of your receipts going back as far as six years, and failure to produce these could lead to some hefty penalties.
How will this affect my tax bill?
So after all this, what is the benefit to you? Well, the money you spend on business expenses is exempt from taxation, meaning your tax bill will be much lower, allowing you to recoup some of the costs you’ve paid to be self-employed. We’ll illustrate this with an example, but bear in mind this is very oversimplified.
Let’s say you earn £20,000 in a year. If you don’t claim any expenses, you’ll be taxed on that entire amount, leading to a tax bill of about £3,000 at the end of the year. However, if you’ve spent £5,000 of that money on business expenses, you’ll only be taxed on £15,000 of it.
In practical terms, that would halve your tax bill to around £1,500 (in this example). It doesn’t cover the entirety of your business costs, but it is a significant saving that allows you to invest more in growth.