One of the benefits of working as a limited company contractor is the opportunity to claim tax relief on a wide variety of business related expenses. Whether the expense is paid for out of the company bank account, your personal bank account or on a credit card you should consider whether it qualifies for tax relief and if so ensure this is correctly claimed against your company tax bill and your VAT liability (if you are registered as standard rated for VAT).
Ensuring you claim expenses will reduce your company’s taxable profits and therefore reduce your overall tax bills i.e. enhance your take home pay. If the expense has been paid for out of the company’s bank account, you should ensure that you make your accountant aware of the nature of the expense so they can claim the appropriate deduction against the company’s income i.e. reduce its profits and therefore reduce the amount of tax the company pays.
In addition, if you have paid for a business-related expense personally you should ensure the company reimburses you for it as the reimbursement will be tax free and will allow the company to claim the tax relief.
What can you claim?
The general rule to consider when deciding if an expense qualifies for tax relief is whether the expense is incurred wholly and exclusively for the purpose of the business and to ensure that the expense is necessary for trading activities. When advising on expenses I generally split these into two camps:
- Expenses related to attending a temporary worksite
- Other business related expenses
1. Expenses related to attending a temporary worksite
The reason I look at this as a separate category of expenses is because there is an extra hurdle to jump over to be eligible for tax relief. This hurdle is to ensure that the work place you attend to carry out the contract is a temporary workplace. The first hurdle to clear is to ensure that your contract falls outside of IR35 – if it inside IR35 then the workplace will be classed as a permanent workplace (like that of an employee) and you cannot claim tax relief in any costs associated with attending that worksite.
If your contract is outside of IR35 i.e. you are genuinely self-employed you then need to consider the duration you expect to be at that worksite and what percentage of your time is taken attending that worksite. At a high level, if you spend less than 40% of your working time at a worksite, your visit is infrequent and there is no fixed pattern to your visits, then it is likely to qualify as a temporary worksite. If you spend more than 40% of your time there or visits are frequent and follow a regular pattern, then if you do not expect to attend the site for a period exceeding 24 months then it will qualify as a temporary worksite. Determining whether a worksite is temporary or not can be a complex area so ensure you seek advice from your accountant if in doubt. HMRC have also published guidance and worked examples in their Booklet 490 .
Once you have established that a workplace is “temporary” then you can claim the following types of expenses:
- Mileage incurred in your privately-owned car to attend the workplace (45p per mile for the first 10,000 in each tax year, and 25p thereafter). This tends to work out better than claiming the actual cost of fuel
- Bus, train, flights, taxi fares and bridge, tunnel, road tolls
- Accommodation costs – hotels, renting an apartment
- Food and drink costs – providing it was acquired during the business trip i.e. a packet lunch prepared at home before you leave doesn’t qualify
- Incidental overnight allowance – £5 per night in the UK, no receipts required
2. Other business related expenses
Other common expenses, which aren’t linked to the above, are detailed below. You do however need to ensure that there is no private use element to these – if there is, the whole cost may be disallowed or only a proportion of the cost is available to claim:
- Accountancy and insurance costs
- Tools and equipment necessary to trade e.g. laptop, printers, office furniture
- Mobile phone costs – if the contract is in the company name and the company pays for the bill then full relief is available on these costs regardless of the business v personal use proportion – this is a tax incentive to encourage employers (i.e. your limited company) to provide employees (i.e. you!) with a mobile phone
- Provision of life insurance via a relevant life policy – this is a specific type of life insurance cover available to limited company contractors who qualify for tax relief
- Subscriptions to professional bodies – if it appears on list 3 it qualifies for tax relief
- The cost of a work-related training course is an allowable expense, if the training is for the furtherance of an existing trade and not to prepare the business to commence a new trade
It is important to keep an audit trail of the expense you have incurred and if there is any element of doubt or a reason why the expense was incurred for business and not personal reasons. Retaining receipts (either original or good quality scanned copies) is recommended as it will satisfy HMRC that the expense was incurred if they audit your business records. If a receipt is lost or not able to be obtained you should try to pay by credit or debit card to ensure there is a record of the transaction on your bank statements.
If tax relief is claimed for an expense which subsequently turns out to be disallowable i.e. not eligible for tax relief then your company could have to pay back taxes, your personal tax position may be impacted as a “benefit in kind” may arise and you could also suffer penalties and interest charges. It is therefore important to ensure that your accountant is providing you with support and advice regarding expenses to help you to mitigate the risk of getting things wrong.
If you would like further information and guidance on what expenses you can claim as a self-employed professional simply download our FREE Expenses guide here