Contractors can claim accommodation expenses when working on a contract site, attending interviews or going to meetings. Any expenses must be “wholly and necessarily” required, and cannot include personal expenses.
Hotels and Bed & Breakfasts
Contractors may have to stay away from their normal place of residence when working on-site, attending an interview, a meeting or while undertaking business related training. The costs involved can be classed as a business expense, meaning the VAT can also be reclaimed.
Personal Incidental Expenses
A contractor can also claim £5 per night for Personal Incidental Expenses in the UK, and £10 when staying abroad. This is designed to cover the costs of laundry, newspapers, and other miscellaneous expenses that may occur.
If renting accommodation is a cost effective alternative to staying in a Hotel, then rental costs can classed as a business expense. Contractors can also claim the associated costs of the utilities at the rented premises. In order to claim these expenses, the contract for the rental of the property should be in the name of the employer or the Limited Company.
Contractors who wish to help the environment and their own waistline can claim bicycle expenses. In 1999 the ‘Cycle to Work Scheme’ was introduced as part of the sustainable carbon reduction policy, aiming to make cycling to work a palatable alternative to taking the car.
The bicycle must remain the property of the company and it must be used more than 50% of the time for travel to work. Contractors can purchase a bicycle plus necessary equipment in the company name and loan it to themselves. The company will benefit from reclaiming the VAT and capital allowances. Where a worker uses their own bicycle for business travel a mileage allowance of 20p can be claimed.
Contractors and freelancers can claim expenses on their Broadband connection. In order for expenses to fall within the “wholly and necessarily” rules the account must be established in the name of the company. If the Internet is in a personal name, only the business usage may be claimed back as an expense.
Contractors can claim childcare vouchers through their Limited Company under the Government childcare voucher scheme. Through the Childcare Voucher Scheme employees are able to claim up to £55 per week (£243 per month) in childcare vouchers. These are exempt from tax and National Insurance Contributions, and are available to each parent and legal guardian.
The scheme can be accessed:
- By registering with HMRC
- By using a third-party provider who will administer the scheme on your behalf
Conditions of the Childcare Voucher Scheme:
- The child must live with the employee. The scheme is available to each parent or legal guardian.
- The scheme must be offered to all employees, and all must be able to claim expenses.
- Vouchers cover children up to the age of 15. Vouchers can only be used to pay a registered and approved child carer (Registered childminders, nurseries, after school clubs, holiday clubs etc). Childcare vouchers cover the care of children up to the 1st September after their 15th birthday. In the case of a child with disabilities, they are covered up to the 1st September after their 16th birthday.
- If a relative is the child carer then they need to be registered and also care for other children to whom are not related
- A Director’s Limited Company may pay the childcare directly and deduct it against profits as an expense. In this case, the childcare contract should be between the company and the child care provider.
Contractors can save tax by choosing the right combination of salary and dividends. A director’s salary is an annual payment made by the company to the Director and is usually paid at monthly intervals.
The gross salary and employers National Insurance Contributions are a deductible expense against the profits made by the Company and so reduce the Corporation Tax payable by the company.
Setting the level of salary is dependent on various factors:
- Working Tax Credits
- Job Seekers Allowance and Other State Benefits
- Earnings from a previous job in the same tax year
- State Pension Entitlement
- Personal or Company Pension Contributions
- Personal Tax Allowance
- National Insurance Contributions
For contractors entertainment expenses are usually disallowed. However in some specific circumstances Input VAT may be reclaimed.
In order to claim entertainment expenses you must be able to prove the expense was business-related. Business entertainment must have been free of charge to the recipient. Additionally, Business entertainment cannot be provided to an employee of the company.
Expenses that are considered to be business entertainment:
- Food and drink
- Theatre and concert tickets
- Sporting events and access to facilities
- Entrance to clubs and nightclubs
- Use of capital assets such as aircrafts and yachts for entertaining
If you are a contractor who uses the flat rate scheme you cannot claim Input VAT. However, you may be able to claim subsistence expenses.
Freelancers and contractors can claim expenses on eye tests.
HMRC states directors can claim employee expenses on:
- Eye tests that are required by health and safety legislation for employees who are required to use a computer screen or other VDU
- Glasses or contact lenses that you’re obliged to provide because an eye test required by health and safety legislation shows them to be necessary for VDU work – as long as the glasses or lenses are only used for VDU work
- Expenses cannot be claimed on glasses or contact lenses that are used for everyday wear.
Contractors who work from home are entitled to claim home-working expenses. There are several different options through which contractors and freelancers can reimburse home expenditure:
Contractors who work predominantly on-site and use their home to manage business, keep accounts and search for work, can claim an allowance of £3 per week (or £156 per year).
For contractors who have a room set aside in their house where more than accounts and paperwork are managed. For example, a home office where a large percentage of work is done.
Three factors are taken into account when apportioning this expense:
- Area: What proportion in terms of area is used for business purposes? Find out the total square footage of the property, and work out what percentage is set aside for business use.
- Usage: How much is consumed by the business activity? This is appropriate where there is a metered or measurable supply such as utility bills.
- Time: How long, per day, is it used for business, as opposed to any other activities that may take place?
In the case of office space located within a residential property, the Director of the company calculates the apportionment of the costs as above and charges rent to the company in exactly the same way you would a tenant. The rent is shown as income in a self-assessment Tax Return and claims the apportionment of the costs as deductible against income.
In this way a Limited Company gets the same benefits as a sole trader.
NB: Although this method is effective if there are substantial running costs it will complicate your tax return and may result in a challenge from HMRC.
For businesses using an outside building located on the same premises as a residential property, the office must be used only for business use and not for any residential use. If there is any residential use, the above apportionment options must be used.
A separate building used for business exclusively will be an asset for the business and so relevant tax rules will apply. HMRC will view this office as being separate from the main residence and allow tax deductions.
The purchase and construction of the building will be a capital asset for the business. This means costs can be written off over a number of years if required. The cost of any customisation or renovation will be allowed as costs against the profits of the Limited Company.
Magazine and Book Expenses
Contractors can claim expenses for certain books, publications, journals and periodicals required for their business.
HMRC bases its guidance on books and publications expenses on the principle of whether the expense is “reasonably incurred”.
When considering books and publications each expenses item should be considered separately.
Before you claim expenses for books and publications make sure that:
- No-one personally benefits from the item
- That the publication is a necessity for the business and not for self-interest
- Generally, books, newspapers and magazines are zero rated for VAT purposes.
Contractors claim a tax-free mileage allowance for the costs of their business journeys made in their own vehicle, under the Approved Mileage Allowance Payments Scheme.
Travel should be to a temporary workplace. A ‘temporary workplace’ is defined as a workplace “attended by an employee for a limited duration of time or for a temporary purpose”. For the director of a Limited Company this is somewhere attended for less than 24 months. In the case of contractors this is usually a site they are working on.
To calculate your mileage allowance, simply multiply the number of miles by the allowance for your mode of transport below -
- Car or Van: 40p per mile for first 10,000 miles, 25p per mile after that.
- Motorcycle: 24p per mile.
- Cycle: 20p per mile.
This tax-deductible expense is beneficial for Contractors who have to travel frequently to a client’s premises.
Mobile phone expenses
Most contractors will use a mobile phone for both business and personal calls. You can claim a mobile phone expense as a tax-deductible expense if -
- The mobile is owned by the business (the contract is in the name of the business)
- Invoices are made to that business
- The phone is provided for business use and has “reasonable” personal usage.
More information for freelancers and contractors:
- HMRC do not recognise Pay As You Go top up costs as a tax deductible expense for a limited company, on the basis that PAYG is mostly used by individuals for personal use.
- Since 2009 Blackberrys, personal assistant devices (PDAs) and smartphones are now classified as mobile phones for the purposes of legislation.
- If a mobile phone is only used for business then all of the input VAT is reclaimable. If there is some personal usage then only an apportioned amount of VAT may be reclaimed. However, this does not apply with the Flat Rate VAT scheme, as there is no input VAT.
Subsistence expenses are business travel expenses such as meals, similar to Personal Incidental Expenses. If subsistence expenses are incurred while traveling on allowable business journeys, employers are able to make subsistence payments tax and NIC free.
Contractors should simply reimburse the expenditure they incur, however proof of the expenditure (receipts/invoices) must be available.
Contractors can claim expenses on travel costs, aside from the above-mentioned mileage expenses. HMRC states that deduction is allowed for the full cost of travel where attendance is necessary.
“Necessary attendance” refers to journeys made to or from an event or venue that must be attended in order for the performance of duties to be carried out – for instance a meeting in a different city or attendance of a conference abroad. This does not include ordinary commuting travel or private travel.