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As your accounting partner, we at Nixon Williams want to make sure that we make your life as a contractor as easy as possible, which is why we have created the below list of frequently asked questions about expenses.
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.
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.
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. You can consult our guide to pension contributions for more information.
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, 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 this would be an allowable 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. For more information, you can consult our guide to clothing expenses.
Claiming furniture for your home office is an acceptable expense, however, there are certain criteria that would have to be met:
•It must 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 HMRC 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
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 directly from the company bank account.
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 an 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.
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.
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. However, as expenses work on a case by case basis it is always a good idea to speak to an accountant for information about your individual circumstances.
According to HMRC, a business expense refers to costs which are incurred 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:
Costs that are not wholly and exclusively for the use of your business are not classed as 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).
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 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.
Any expense you claim must follow HMRC’s guidelines, which means that all expenses claimed should be wholly and exclusively related to assets which apply to your role or profession.
As a client of Nixon Williams, you have access to Vantage, our bespoke online accounting software which is designed to help you keep track of your expenses.
If you incur a business expense and pay for the cost personally you can reimburse the amount from your limited company profits. As a Nixon Williams client, you can 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.
If you pay for business expense costs directly from your limited company bank account then each cost needs to be recorded as an expense. As a Nixon Williams client, 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.
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.
HMRC requires all expense receipts and invoices to be kept for a minimum of six years. The invoices/receipts should show an itemised breakdown of the purchases and separate the VAT if it is being reclaimed.
To claim, or not to claim?
If you cannot find the answer to your questions, we’re here to help. We’re always looking for new challenges to help contractors along the way.
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