If you are new to contracting, the first year of your contracting life is the hardest. The trickiest task is trying to get to grips with the UK’s complicated tax system.
Now that you are effectively working for yourself, your end goal is to try to maximise your take home pay. Having some knowledge of how the tax system works and tax allowable business expenses could reduce the amount of taxable profit (as the company receives tax relief on these costs). If the company’s profits decrease your tax bill could decrease too.
The vast majority of IT contractors operate via a limited company and outside IR35, so this week’s article looks at what HMRC deems allowable business expenditure.
HMRC’s definition of a business expense is “costs which are wholly and exclusively for your business’. So, if you use it solely for your business, great. It is not so great if you use it in your business and personal life, as you may not be able to claim it as an expense or have to pay tax on the value of such benefits, known as ‘benefits in kind’.
Need it, buy it, claim it
Let us look at what expenses are allowable. This is not an exhaustive list, we strongly recommend speaking to an experienced accountant, such as our ourselves to get the full run down:
- Business Travel – can claim mileage of 45p per mile for the first 10,000 miles and then 25p per mile, parking and congestion charges
- Contributions made to a pension scheme
- Stationary expenses: folders, pens, business cards, postage etc
- Equipment costs: laptops, desktops, printers, software, office chair and desk, lightbulbs etc
- Charges related to the company bank account
- Subscription costs to professional organisations (HMRC have an approved list, so please check to see if the organisation you belong to is on there)
- Magazine / journal subscription costs (if allowed by HMRC and related to your contract work)
- Phone, mobile and broadband costs (only if the contract is in the limited company name)
- Accountancy fees (this is usually a monthly cost and any ad-hoc charges that are related to the company)
- Data protection registration and renewal
- Training courses / Seminars that you attend relating to your contract work
- Advertising costs related to the company ( e.g. advertising in journals, magazines, online adverts etc)
- Temporary accommodation / rent – if required to stay away from home. You can also claim for meals.
We recommend that you keep all your expense receipts for 6 years in case HMRC choose to investigate.
It is important to remember the 24-month rule – employees who work at a permanent workplace do not qualify to claim travel expenses. When travel does qualify, then any subsistence and accommodation expenses related to the travel are also available.
And some that you may not know about
It is not widely known (and HMRC do not advertise it either) that the costs for one private medical health check per year and eye test are deemed as allowable business expenses without attracting a ‘benefit in kind’ charge. This is particularly relevant to you as an IT contractor as you probably spend around 10 hours a day looking at a computer or laptop screen. The cost of this is allowable for each employee of the limited company, so your partner might be entitled to it as well.
Home and Away
As an IT contractor, you may typically spend most of your contract on the clients’ site, but you may be able to claim the flat rate £4 per week allowance for running a home office.
Alternatively, if you are not based on the clients site and you work from home, seek advice from an experienced accountant as you may be able to reclaim a fair proportion of your home running costs, but you will need evidence of this.The running costs of your home can include mortgage interest and utility bills.
Don’t get caught in the contractor’s trap of buying a car through the company. Many have done it and have gone on to regret it. You are probably better off claiming mileage for your own car than owning a car via your limited company.
Trying to make your way through the muddy water of expenses can be a scary and difficult task. Luckily for you, we are here to guide you through it. Check out our website to find out what Cogent can offer you. It’s more than you think!