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Claiming Business Expenses

As a freelance contractor you will undoubtedly incur business expenses associated with undertaking an assignment at a client site. The good news is that some of these business expenses may be claimed on a tax free basis.

If you’re a contractor running a limited company you normally split contract income between salary, expenses and dividends (if outside IR35) as this reduces tax payable on contract income. The level of expenses you take depends on actual expenses incurred but you should consider how proportionate expense claims are to the level of salaried income. Taking a salary of £12k and expenses of £15k may seem artificial to the HMRC which may lead to unwanted attention.

When claiming business expenses you need to ensure that:

The expense is wholly, exclusively and necessarily incurred in the performance of your duties
The expense is allowable by the HMRC if caught by IR35
Site Based Rules are complied with if it is a site-linked expense

Allowable Business Expenses

Business expenses may be claimable before tax is deducted so long as the expense was incurred wholly, exclusively and necessarily in the performance of your duties. It is important to understand that as the Director of your own limited company you are solely responsible for whether or not an expense is claimable.

To claim an expense you must be able to show a valid receipt for the claim and ensure that you comply with site based rules. Claimable expenses may include:

Travel
Subsistence
Accommodations
Computer Supplies
Postage and Stationary
Accountancy Costs
Business Telecoms
Trade Journals
Legal Fees
Website Design and Hosting
Business Insurance

The expenses listed above are not exhaustive. For more details see Contractor Expenses

IR35 and Business Expenses

The amount you claim in business expenses is affected by your IR35 status. Where caught by IR35 you may be restricted to a 5% administration expense claim. This is for business administration expenses such as business insurance and accountancy fees. Site based expenses are still claimable by those Inside IR35. However, if you find that you are undertaking a number of assignments that are considered Inside IR35 you may be better off with an umbrella company solution such as Expat Advantage or Payroll Umbrella. For more information on umbrella company solutions call Commonwealth Contractors now on 0800 294 4388.

Recording and storing Expense Claims

All expense claims should be backed up by receipts to prove the cost was incurred (except Business Mileage which can be claimed on a pence per mile allowance). You should tabulate all expense claims and file them for future reference. If the HMRC decide to inspect your company they may wish to see which receipts related to an expense claim. Where unable to find these receipts you could face a large and unwanted tax bill.

To find out more about going into business with your own Limited Company call Commonwealth Contractors now on 0800 294 4388 or submit your details and we will get right back to you

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