There are more than a few advantages to becoming a contractor; you have the opportunity to earn more money than a permanent worker, as well as having more freedom and control of your destiny.
One of the main financial benefits is being able to claim contractor expenses, and the higher your expenses, the lower your tax bills ends up being, but remember expenses have to be wholly and exclusively for your business and backed up by evidence such as receipts. This is because when you make a claim you only get taxed for your profits, with the amount spent on your business through expenses remaining tax free.
What can I claim for?
In order to claim back your contractor expenses they must be a cost that was made for the running of your business… However, it’s not always as simple as this, as what you can claim back on will all depend on certain factors, such as whether you fall inside or outside IR35 .
Types of expenses
The most common expense is for travel, particularly if you have a car and have had to meet clients etc. In order to calculate these costs you would need to add up the miles used for business in your car, and then claim back £0.45 per mile for up to 10,000 miles and over 10,00 miles £0.25. It’s recommended you set up a mileage spreadsheet to keep track of how miles you have driven.
Other examples of some of the expenses you can claim as a limited company contractor (outside IR35) include:
- Accountancy fees, which includes your limited company formation
- Any business travel
- The cost of work equipment
- Business telephone calls
- Business ‘entertainment’
- Computer software
- The rent, heating and lighting of your business premises
- Stationary and postage for work
- Books and magazines that are relevant to your business
- Bank charges on business accounts
- Meal allowance, which can be claimed when working on a remote site
- Employers NI contributions.
What can’t I claim for?
- Training courses not specific to your trade
- The cost of a degree
- Private school fees
- Clothing – unless it is a specific type of work uniform, such as a lab coat.
- Meal allowance – unless you are working at a remote site away from your normal place of work, or when staying away from home overnight.
- Parking fines or speeding tickets
- Certain accommodation costs – the cost of hotel or bed and breakfast can be claimed as an expense, however, the cost must be deemed to be ‘reasonable’
- Anything you don’t have a receipt for.
It’s really important that you keep hold of any receipts for the expenses you wish to claim for at least six years, as HM Revenue and Customs could ask for evidence of these expenses, if they choose to investigate.
For more information on expenses, the SJD Accountancy contractor guide is a really useful tool. Also, seeking professional advice from a good contractor accountant will answer any other questions you may have on the financial side of contracting.