When you are a freelance contractor you will incur certain costs. Some of these can be claimed before taxes are applied - i.e. they are 'tax deductible'. It is therefore important that as a contractor, you know what counts as a valid expense, so you can keep your tax bill as low as possible.The rule for claiming expenses is "that an employee or office holder may deduct expenses incurred wholly, exclusively and necessarily in performing their duties”
It is important to realize that whether an expense is valid or not is not affected by your decision to operate through your own limited company or an umbrella company. The amount of allowable expenses you can claim will depend to a large extent on your IR35 status.
The list of valid expenses you can claim is longer if you are working on contracts which are outside the scope of IR35.
Valid contractor expenses outside of IR35:
The expenses allowable for a contract not caught by IR35 would be as follows:
- Your gross salary – this would usually be kept low, in order to maximize dividends payable to yourself as shareholder (thereby avoiding employees and employers national insurance contributions).
- Spouse’s salary (which must be actually paid and not unrealistic, having regard to the duties performed).
- Travel expenses.
- Motor expenses (mileage claims if the car is personally owned).
- Accommodation and subsistence.
- Telephone and business calls only.
- Books, magazines, subscriptions and courses – where related to business and your contract work.
- Bank charges and interest – on your company bank account.
- Pension scheme – where paid by the company to a HMRC approved scheme.
- Business insurances – professional indemnity, business contents and other business related insurances.
- VAT on expenses if your company is VAT registered.
- Computer costs.
- Accountancy costs - if using a Limited Company.
Valid contractor Expenses if caught by IR35:
The expenses allowable for a contract which is caught by IR35 would be as follows:
- Your gross salary - this would need to be calculated in accordance with the IR35 regulations (rather than a fixed low monthly salary as above).
- Direct business expenses incurred specifically in respect of the contract work.
- Travel expenses (depending on the circumstances of the contract).
- Administration expenses (limited to 5% of the gross fees receivable).
Dispensation Agreements with Umbrellas Affect Expense Validity
Dispensation agreements are granted locally for each umbrella company and vary. They are simply a way of reducing the amount of paperwork required to be completed by the employer (Umbrella Company).
They do NOT 'guarantee' that the individual should not have receipts for their valid business expenses.An individual cannot claim for an un-receipted business expense that they did not genuinely incur and can evidence.
A dispensation is simply a way of reducing administration and should not be viewed as a way to claim carte blanche on all types of un-receipted expenses. Receipts should be kept for all the expenses that you claim.
It is important to remember that claiming for expenses that you have not incurred would be viewed by the Inland Revenue as tax avoidance. Our final word on this rather complicated subject is that if you are not sure whether or not a cost can be claimed as an expense, remember that you cannot state your expenses as gospel. The moral is: only claim those costs that you have actually incurred.
The opportunity to manage your tax liability is one of the most important motivators for a contractor choosing to operate via limited company.
In most cases, of course, a contractor will not have to work out their own tax liability - this is one of the main reasons why you will need services of experts.
We at BNW Accountants & Tax Consultants are focused on providing you with the best and affordable services. Expert advice is strongly recommended to discuss taxation with our specialized team and get their view on the best way to arrange and present the accounts for your limited company's specific situation. We are based in Mitcham and Redhill and have clients across Europe, UK and in particularly London.
Remember - getting the balance right between the various types of income, and therefore the various types of tax, is central to maintaining your company's profitability and achieving that goal of tax efficiency that sent you down the limited company route in the first place.
The above information has been summarized for our clients understanding and can only be used at a starting point, should you require detailed understanding or any further help please contact us through telephone, email or our contact form.