One of the perks of being an independent contractor is the ability to claim business expenses as these are not taxed.
There are various software tools available for contractors to keep a record of their expenses and help file them with the relevant tax authorities. They include the easy-to-use online accountancy offering such as Freeagent which can be provided by Pulse Accounting.
Indeed, the expenses that can be claimed by a contractor are a crucial part of their working life and will help them make more money from a contract as a result. It is in fact, one of the benefits of using a limited company as a contractor.
For contractors who are ‘inside’ IR35 then they can claim a 5% flat rate of the contract’s income, as well as their pension contributions and some professional subscriptions.
For those who are ‘outside’ IR35 there are other expenses to be claimed but the overriding issue to appreciate is that the claimed expenses should be ‘wholly, exclusively and necessarily’ for your business. HMRC does not enjoy seeing unnecessary expense claims.
If you have questions about what IR35 is and how it affects you and for any issues over reimbursed expenses as a self-employed person, then the Pulse Accounting team can help.
What can a contractor claim for in expenses?
So, what can a contractor claim for in expenses?
When it comes claiming for expenses, you can claim for your every day running costs including travel, insurance fees as well as an office, if you have one, and any subcontractor fees.
For those contractors using an umbrella company, their travel expenses can be allowable though for contractors working through an agency they may not qualify for travel expenses because the taxman may see their travelling as commuting between their home and workplace.
All expenses must be for the business and you'll need to provide appropriate evidence such as receipts and mileage records where necessary.
Also, any advertising, marketing or training costs you incur are also classed as 'allowable expenses'.
And, with some professions, there are other expenses that a contractor can set against their tax bill, for example, uniforms and specialist clothing. You cannot claim for a suit you wear for work.
Contractors can also claim capital allowances
Contractors can also claim capital allowances for equipment they have bought to use in their business.
Some may find the annual investment allowance (AIA) as a useful tool since a business can claim up to £200,000 every year. With the exception of cars, the allowance can be claimed for most of the equipment necessary for a contractor’s business.
However, there are some basic mistakes contractors will make and they may, for example, list their personal expenditure as a company expense. This is not allowed.
There will be contractors completing their self-assessment tax forms that believe that the tax they incur under self-assessment will be as a result of their business activities and, therefore, an allowable business expense. This is not a business expense, it is a personal expense.
Other items that contractors may be tempted to claim for will be personal insurance payments and even a Netflix account.
Having a good accountant or using Pulse Accounting
For many contractors, having a good accountant or using Pulse Accounting will help them stay on the straight narrow and they can answer any queries on which expenses are allowed.
If you are a contractor using an ‘umbrella company’, the firm providing the service can also offer help and advice with some offering a template to help contractors keep a record of their business expenses.
Indeed, some contractors may also be registered for VAT and it is good advice to speak with an expert who understands VAT returns as well as corporation tax and self-assessment.
However, it's not all bad news, pension contributions are an allowable expense - so your contributions are effectively tax-free - as our professional subscriptions.
You also need to keep records of business and mobile telephone calls, stationery, salaries, business entertainment costs as well as computer hardware and software.
The contractor can also claim for their company bank charges and also bank interest and for the use of their home as an office they can claim a part of their household bills.
Essentially, by claiming more expenses against your tax bill will boost profitability and you'll be claiming for things that permanent employees cannot do.
HMRC runs a helpline to help contractors who may have questions about their allowable expenses. Contact them on 0300 200 3310. Or speak with the Pulse Accounting team on 0161 300 9675.
To speak to a member of our team please contact us at:
Call: 0161 300 9675