What is a Business Expense?
As a Limited Company contractor costs that are incurred wholly and exclusively for your business can be claimed as business expenses, which means that you will receive tax relief on these costs. Claiming business expenses correctly could reduce your tax bill so it is worth taking the time to understand what you can and cannot claim. Our expenses guide for contractors details how expenses can affect your tax bill, examples of what is and is not classed as an expense and the process involved in making a claim.
How can expenses affect my tax bill?
Claiming business expenses correctly could affect your tax bill. Business expenses are deducted from your company profits and as you only incur tax on your profits, if your profits decrease then your tax bill could decrease as well. Please note that expenses work on a case by case basis so it is always a good idea to speak to an accountant for information about your individual circumstances.
If you earn £5,000 a month and you do not have any expenses then you must pay tax on the full £5,000.
However, if you were to earn £5,000 in a month and incur £1,000 in business expenses, your taxable profits would be £4,000. This is because your business expenses are deducted from your total earnings to leave your taxable profits.
This example does not factor in VAT, PAYE, dividends and the flat rate VAT scheme. It is therefore best to speak to your accountant for a more detailed account of how claiming expenses could affect you.
As a contractor what costs could I claim as a business expense?
HMRC define business expenses as costs which are incurred are wholly and exclusively for your business. As a limited company contractor operating outside of IR35 you may be able to claim costs if they fit this description. See below for some examples of business expenses:
- Accountancy Fees – As a limited company contractor you may wish to hire an accountant to take care of your personal and business taxation requirements. As this cost is directly related to the running of your business the cost could be claimed as a business expense. Other professional fees such as legal fees could also be claimed.
- Business Travel – If you are required to travel for your business then you are able to claim the cost as a business expense. Contractors can claim mileage of 45p per mile for the first 10,000 miles travelled in a financial year and 25p per mile thereafter. This amount covers fuel and any wear and tear on your car. If you take a passenger in the car with you then you are able to claim an extra 5p per mile. If you travel via public transport you are able to claim the cost as an expense as long as you keep the receipt. Toll fees, congestion charges and parking costs are also able to be claimed as expenses.
- Accommodation – If your business requires you to stay away from your permanent address then the cost could be claimed as an expense. You may also be able to claim for meals and a small amount per day for personal items.
- Mobile Phone Bill – If you use your phone entirely for business related use then you are able to expense your entire phone bill. However, most contractors will use their phone for both business and personal use and in this case only the minutes and texts that have been used for business purposes are able to be expensed.
- Training Courses – If the training course in question is wholly and exclusively for business purposes then the cost could be expensed.
- Stationery – Branded stationery such as letter heads, envelopes, pens and other items are able to be claimed as expenses if they are used solely for business use.
- Clothing – As a general rule clothing that could be used as part of your everyday wardrobe such as business suit or business dress cannot be claimed as an expense, even if you only use them for work. Clothing that is able to be claimed as a business expense includes branded uniform items and protective work clothing.
What costs cannot be claimed as an expense?
Costs that are not wholly and exclusively for the use of your business are not classed business expenses. Some common examples of costs that you are not able to claim are most medical treatment costs, client entertainment, childcare, gym membership, parking fines and speeding tickets (even if they are incurred on business trips).
How do I claim business costs as expenses?
As a limited company contractor claiming expenses it is incredibly simple. If you pay for the expense yourself then you will need to complete a bank transfer or write yourself a cheque from your limited company bank account to your personal bank account. If the expense cost is taken directly from the company bank account then each amount must be recorded so that you can accurately calculate your profits. As a client at Nixon Williams you have access to Vantage, our bespoke online accounting software, which is designed to help you keep track of your expenses.
Business expenses paid personally
If you incur a business expense and pay for the cost personally you can reimburse the amount from your limited company profits. Simply use the Vantage ‘Expenses’ tab to record the details of each expense you have incurred and submit when you are ready to make a payment from your company to your personal account. Vantage will account for all of the business expenses incurred when calculating the company’s profits.
Business expenses paid directly from your company
If you pay for business expense costs directly from your limited company bank account then each cost needs to be recorded as an expense. When adding bank transactions on Vantage ensure that you note which payments are expenses. Vantage will then take account of expenses when calculating the company’s profits.
Certain expenses such as company pension contributions should always be made from the company bank account to avoid any further tax implications.
Recording your Expenses
Whether you pay for an expense yourself or from your company bank account, if it is being claimed from the company in some way (and the company is receiving tax relief on the cost) then you must keep proof of purchase. Expense receipts and invoices should be kept for a minimum of six years in case you are investigated by HMRC. The invoices/receipts should show an itemised breakdown of the purchases and separate the VAT if it is being reclaimed.
Frequently asked expenses questions
Can I claim the cost of glasses?
The provision of an eye test is allowable as a business expense to employees. As with all expenses if you can justify the cost as being wholly and exclusively for business purposes then it can be claimed (normally the glasses must be for VDU work only), though this could be hard to justify and in most cases are seen as being for a dual purpose.
Do I need to keep receipts?
HMRC require you to keep hold of all paperwork, including receipts as these form your business records. There are different timescales relating to different taxes so we would advise holding onto everything for a minimum of 7 years.
How can I make pension contributions?
You can either make personal pension contributions or employer contributions from your company and depending on your current circumstances each method could be advantageous to you from a tax perspective. Nixon Williams are not authorised to give any specific investment advice so we cannot advise on which pension product(s) to choose, only the tax reliefs involved. Please see our Pension Contributions page for more information.
Can I pay my partner a salary?
You can pay your partner a salary, however, this can be difficult to justify to HMRC. If your partner was to be carrying out general administration duties then HMRC would not see this as taking more than a couple of hours per month paid at an appropriate hourly rate. If your partner was working through the business and generating income then by all means this would be fine, however, this would incur an additional fee from ourselves for the salary to be issued.
I have purchased some new clothing to wear while working. Can I reclaim the cost of this as a business expense?
The cost of everyday corporate clothing such as shirts, blouses, trousers, skirts and suits would not normally be reclaimable as an expense. The only exception to this might be if the clothing was uniform or protective clothing. The clothing cannot be claimed as a uniform simply because all workers are required the wear this type of clothing, the test would be if someone wearing the clothing would be recognisable in the street as wearing a uniform, such as a fire fighter or a nurse. If such work clothing were to be provided, it would constitute a benefit in kind and as such would be subject to additional income tax and NICs.
I want to claim for some furniture and for the re-decoration of my home office; I trust that this is acceptable?
Claiming furniture for your home office is an acceptable expense, however, there are certain criteria that would have to be met:
- It must first and foremost be relevant and its cost not excessive for its purpose as office furniture - furniture up to a value of £300 is unlikely to be questioned in an investigation
- The personal use of the furniture must be insignificant - when measuring significance, the frequency of the furniture’s use for work purposes should be considered, if personal use is anything more than insignificant a benefit in kind would arise
- In the event of an investigation from the HMRC, you must be able to justify that the personal use is insignificant. If you are not confident that this justification can be met, we would advise that you do not claim for the furniture.
Can I rent an office to work from and how do I go about it?
If you wish to rent an office to work from that isn’t a room/office in your personal residence (please see our Home Office page for more information) then this is a possibility, however, it will be best to ensure that; the requirement is absolutely necessary to the running of the business, the rental agreement is in your Limited Company name and ideally paid direct from the company bank account.
I wish to build an office at the bottom of my garden which will be used as an office space; can I claim this as a company expense?
Whilst you could theoretically claim for an expense of this nature, it is certainly not something that we would advise is claimed and there are several things that should be taken into account before making a decision as to whether to proceed:
- You could potentially lose out of the full benefit of Private Principle Residence relief (PRR) and thus suffer capital gains tax when your home is sold
- If such an expense was to be claimed as a business expense, it should be furnished suitably as an office and so should not contain personal/leisure equipment – in the event of a HMRC investigation you may be required to justify it as an office space not just an improvement to your home
- The cost should not be excessive and any work carried out in its construction should be commercial.
I am thinking of buying a company car, what is the best option?
Generally, company cars are not tax efficient for owner managed companies i.e. where the recipient of the company car is also the sole shareholder, as the same person effectively ends up paying both the employee and employer taxes. Normally the only time a company car is tax efficient is if you are an employee of a company you do not hold shares in or if the car is particularly friendly to the environment i.e. low emissions, however, our page on Company Cars does have further information for your consideration.
Common contractor expenses
For more information on whether you are able to claim individual costs as an expense you may find our individual expense pages useful:
- 24 Month Rule for travel
- Charity, Entertainment and Sponsorship
- Childcare costs
- Company Assets
- Home office
- Pension Contributions
- Training Costs
- Travel Expenses
Why Choose Nixon Williams?
At Nixon Williams our aim is to assist in making your contracting life easier by removing the stress normally associated with accounting, taxation and other financial issues experienced by contractors.
Each of our clients are provided with a single point of contact that will be on hand to assist with any accountancy or tax related queries.