Contractor Expenses Explained
When you’re working as a contractor, there are certain expenses you’ll incur, such as travel, equipment or even entertaining clients. Unlike working for an employer, you won’t have someone there to cover the bill for you, so you’ll be faced with two options as to how to treat those expenses moving forward.
As a contractor you can either offset some of the expenses against your tax bill, or recover the costs from your end client. But beware, both options aren’t always possible. Read on as Umbrella Broker explains the ins and outs of contractor expenses.
What expenses can I claim?
By definition, business expenses are costs that you’ve incurred purely for business purposes. While some are more common, like travel costs, others are more specific and can easily be missed. When considering how to treat your expenses, it’s important to understand the difference between claimable and offsettable business expenses.
Claimable expenses are costs you can get back from the client. On the other hand, offsettable expenses can be offset against tax. While you used to be able to do both through an umbrella company, after a series of clamp downs, most contractors are now unable to offset any expenses while working through an umbrella.
If you have a lot of offsettable expenses, it’s worth considering working through your own Limited Company. If your expenses will be low or can be claimed back from your end clients, then an umbrella company is a good option to choose.
How does IR35 affect expenses?
An important thing to note is that you can’t offset expenses through either a limited company or an umbrella if you’re working inside IR35 (most public sector workers). Limited companies working outside IR35 can still benefit from offsetting expenses, while contractors inside IR35 can only claim administration expenses, some work-related subscriptions and their pension contributions.
This means that for those caught by IR35, the hassle of administering a limited company for little taxable benefit is too great, with the majority opting to use an umbrella instead.
Expenses and tax
If you’re simply claiming back an expense from your client then you will be reimbursed in full for your expense and will incur no tax on the payment.
However, offsetting expenses against tax is not as simple. In essence, your expenses are deducted from your income, to find your true income level. So, if you earned £5,000 in a month on your contract and spent a total of £1,000 on business expenses, you would pay tax on the £4,000 actual income you earned with £1,000 tax-free. Having this amount of your earnings without tax essentially repays you for the money you spent on the expenses in the first place.
This is just a general example, however, and doesn’t take into account the complexities of PAYE taxation or dividend payments. It’s always best to seek professional assistance from an accountant when you’re dealing with taxation and expenses.
With that in mind, this rest of this post will focus on offsettable expenses. Here are the different things you can claim for as an offsettable business expense…
- Travelling by car
During a contract away from their usual place of work, contractors can claim for travel costs. They do so at a rate of 45p per mile up to 10,000 miles in a fiscal year. That’s the tax year, which runs from 6th April to 5th April the following year. After you’ve travelled 10,000 miles, you can only claim 25p per mile.
The mileage allowance covers fuel and vehicle running costs. But you can also claim for parking costs and any congestion charges or toll roads. Contractors can also claim tax back on 5p per mile if they are a passenger in a car. However, it’s important to note that you can’t claim for speeding or parking fines.
- Other transport
If you’re traveling by motorcycle, you can claim back tax at a rate of 24p per mile. Travelling by bicycle, on the other hand, can be claimed for at a rate of 20p per mile. Contractors can claim back the tax for the cost of their journey on public transport too. To do so, you’ll need to keep your receipts or tickets with prices on.
You can claim for any mode of transport, whether it’s bus, train or plane, but it needs to be the most suitable, cost-effective mode of transport for your journey. For trains and planes especially, tickets should be economy class and booked in advance at the best rate, where possible.
- Accommodation
If you need to stay overnight for one or several nights to work on a contract, you can claim back the cost of the hotel as an expense. Again, this should be booked in advance to get the best rate, where possible.
While there is no set limit, any accommodation costs claimed as an expense must be considered ‘reasonable’. So, spending hundreds of pounds per night when cheaper alternatives are available a similar distance away from your place of work could be rejected for being an unreasonable expense.
- Meals
It may surprise you to know that meals can be claimed as expenses. When you’re working away at a remote site or staying overnight for work, you can claim back the cost of breakfast or an evening meal where it’s ‘reasonable’.
Make sure to keep any receipts, as you will need to claim meal costs individually. You can’t claim back the cost of meals for the whole day. Reasonable meal costs can also be claimed back when entertaining clients. So, you can get back the VAT when you take potential clients for lunch.
- Clothing
If you wear your normal clothes to work, you can’t claim anything back as an expense. This includes things like suits, which you might not consider ‘normal clothes’ because you don’t wear them at home.
The distinction comes with clothes that are essential to the work you’re carrying out. This includes branded uniforms with a company logo on or protective clothing like hard hats or high visibility items.
- Office costs
Renting and running an office is one of the biggest expenses for some contractors. Fortunately, your rent, business rates, energy bills and insurance can all be claimed as expenses. Other office equipment can be claimed too, as long as it is something that will be used for less than 2 years.
So, while permanent furniture or computers cannot be claimed, you can claim expenses for the following:
- Phone bills
- Internet bills
- Postage costs
- Stationery and printer ink
- Software being used for less than 2 years or software that is renewed regularly over periods shorter than 2 years
- Training
In some cases, you may need to complete training to improve the standard of work on a particular contract. To claim this back as an expense, it must be relevant to the contract you’re working on.
