Whether you’re an experienced contractor, freelancer or just starting out, it’s important that you know what your business can pay for, often referred to as business expenses. By making the most of these expenses you won’t need to use your personal money to run your business, while you’ll also be able to operate with greater tax efficiency. This is because legitimate expenses are subtracted from your profit and therefore your annual Corporation Tax bill.
But before you get ahead of yourself, remember, many of these are only tax-deductible expenses if they are used ‘wholly and exclusively’ for business purposes.
Stationery, rent for office space, rates and insurance costs are all things you can claim. This includes:
- Mobile phone (if you use your personal phone, you can claim back a percentage of your bill)
- Computer software
- Notepads, pens and postage
- Printing and printer ink
- Business insurance
Working from home
If you work from home, while you can’t claim back rent or your mortgage, you can claim back some of the costs of running your business, including utility bills, some internet costs and even property insurance.
There are two ways of doing this. The first is to claim back a simple flat rate (£6 per week/£312 annually), which HMRC will not question. You can learn more about this method here.
However, if you feel this isn’t a sufficient amount, then you need to work out specific expenses on a receipt basis. HMRC allows you to claim a percentage of bills, such as mortgage interest (but not repayments) and utilities (gas and electricity). Unfortunately broadband expenses can’t be claimed, given the tax office sees this as a cost that would be in place irrespective of whether you worked from home or not. However, if you upgrade your broadband due to working from home, the difference in price can be claimed.
To work out which method is more cost-efficient, you’ll need to gather the following information:
- Total number of rooms in household, including bedrooms and bathrooms
- Number of rooms used to work in
- Number of hours per day working from home
- Number of days per week working from home
- Copies of bills
Once this is done, you can run a calculation to determine the amount you’re able to claim back:
- Number of rooms worked in
- Percentage of time spent working in each room
- Household bill divided by rooms in your house
- Multiply no. 2 x no. 3
This method is more complicated, so if you’re confused, it’s worth chatting to an accountant.
The third and least common option is for your limited company to pay you for rental of office space. While achievable and legitimate, it’s important to note that this will commercialise your property, which would impact your personal tax returns.
Travelling to attend business meetings or going to your client’s office to carry out work are considered legitimate expenses. Therefore, train tickets, bus fares, taxis and flights booked can be claimed back. If you travelled by car, you can claim 45p per mile on every business trip.
Overnight stays are also a tax-deductible expense as long as the costs associated with it are deemed ‘reasonable’ by HMRC. The same applies for meals and coffees.
Attire that you need to do your job – such as uniform and protective gear – can be claimed under allowable expenses. However, everyday clothes, even if you wear them while working, are not included.
Marketing your business is an expense that you can claim for and the following is included:
- Advertising your business in newspapers, directories, bulk mail or online
- Costs associated with your business website
- Marketing merchandise such as free samples of your product
Subscriptions to magazines and newspapers, along with membership costs for a trade body can be an allowable expense if it’s related to your business. However, payments to political parties or gym memberships aren’t deemed legitimate.
Unfortunately, entertaining clients, suppliers or customers, as well as event hospitality, isn’t an allowable expense. That said, HMRC does allow you to entertain company employees (meaning you) and gives you £150 per head to do so each year. So, you can host a Christmas party or treat yourself to a nice meal – and you are allowed to bring your partner. The £150 does include travel to a venue. If you have more than one event, such as a summer barbeque, if the combined total is £150 or less per head, then it still counts as being exempt. Be careful, if you do go over, even if it is by £1, you’ll have to pay tax on the full amount.
Financial and legal costs
The costs of engaging a contractor accountant, solicitor, surveyor or architect can be covered as an allowable expense, if it is for business reasons. Insurance policies such as IR35 insurance or Professional Indemnity insurance can also be claimed.
All charges and fees associated with your business bank account are considered as an allowable expense. This includes:
- Account, overdraft and credit card charges
- Interest on business loans
- Hire purchase interest
- Leasing payments
As part of the tax-free Childcare Scheme introduced in 2017, the Government will pay parents 20p for every 80p spent on childcare, with a maximum contribution of £2,000 per year per child. To qualify, you must work at least 16 hours a week and not earn above £100,000 a year. For more information and to apply, visit the Childcare Choices website.
Alternatively, some contractors choose to make use of the current Childcare Voucher Scheme, which is offered to parents by employers (in your case your limited company). It allows you to pay for childcare via salary sacrifice and claim up to £243 per month tax-free. However, if you hadn’t already set this up by 4th October 2018, you can’t apply – and will have missed the boat.
You can claim the expenses of a training course if it improves the skills and knowledge you use in your business. This doesn’t include courses that help you expand your business into new areas.
As you’ll likely have gathered, there are a number of legitimate business expenses that you, as a contractor, can claim for. Given that making the most of these will also help lower your company’s tax liabilities, it’s important you use them to your advantage. However, as previously explained, you must have a firm idea of what you can and cannot claim, under HMRC guidelines. If you’re unsure, it’s well worth speaking to an accountant, like QAccounting.
As one of the leading accountants in the UK, QAccounting has been supporting contractors for over 20 years. Our range of accountancy packages start from just £95 per month + VAT. To learn more, please request a callback and one of our experts will be in touch.
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