Expenses for Contractors and Freelancers

If a director of a limited company need to work away from home for business reasons and needs to book into a hotel or bed & breakfast for a period of time, then the cost of the B&B is a deductible business expense. Any part of the cost that is considered personal use cannot be deducted as an expense e.g. like the cost over weekends will be considered personal and not for business.

If the director is working away from home for a long period of time, renting a flat becomes a more cost effective alternative than staying at a hotel. In this case, the rent can be claimed as an expense together with associated costs. I.e. Council tax, water and electricity, gas etc. The rental agreement and bills should be set up in the business name and paid directly from the business bank account.

If you use the flat over weekends then you should again reduce part of the expenses in proportion to personal use.

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Accounting fees incurred for normal business purposes is a deductible business expense.

HMRC could enquire into accounts and tax information for any year. Where this enquiry reveals discrepancies and additional liabilities for the enquired year and it resulted from negligence or fraudulent conduct, the accounting and legal fees will not be deductible.

However, the legal costs are deductible in a case which resulted in no additional taxes payable.

Cost incurred to advertise your business is a deductible business expense, as the idea for advertising is to generate more income for your business.

Annual Parties at Christmas or alternative functions of a similar nature, such as an annual dinner dance, which are open to staff, generally, and which cost no more than £150 per head to provide can be deducted as a business expense. Where there is more than one annual function and the total cost per head exceeds £150, only the function that totals £150 or less will be tax deductible.

Conditions to claim this as a business expense:

• it’s an annual event, such as a Christmas party or summer barbeque
• the event is open to all of your employees(even if it is just one employee)
• the cost per head of the event isn’t more than £150

Money must be outstanding for 6 month or longer from a client before it can be deducted as an expense.

Should you receive the money after you have claimed it as a bad debt expense then the money needs to be declared as income again.

If you are cycling to and from work you are able to claim the mileage at £0.20 per mile. The director can’t claim the cost of the bicycle or for repairs to the bicycle as the bicycle will be the director’s personal property and not owned by the business. Only claiming the 20pence per business mile means that there will be no additional tax implication should the bike be used for personal reasons as well.

Example:
John is currently travelling on his bike to one of his client’s premises which are 6 miles away. John can claim £0.20 per business mile done on his bicycle to and from work. John therefore does 12 miles per day (to and from work) at 20pence a mile = £2.40. John can claim an expense of £2.40 per trip to this client as a deductible business expense.

Business entertainment is not tax deductible. If you take out a client you should ask for separate bills, even if you pay for everything – the bill for your food can then be claimed as subsistence.

Please read these links to HMRC website for more information:
http://www.hmrc.gov.uk/manuals/bimmanual/BIM45020.htm and
http://www.hmrc.gov.uk/manuals/bimmanual/bim45000.htm

A business gift is a deductible business expense as long as it is less than £50 per Donee per year and it carries a conspicuous advertisement for the business. If you spend more than £50 on a person then the whole amount becomes non deductible, not just the amount over £50.

The gift must be a business gift e.g. diary or business calendar, and must not be food, alcoholic drink, tobacco or even vouchers that can be exchanged for these items.

Gifts to charities may also be allowed although many will fall foul of the “wholly and exclusively for business purposes” rule.

Car hire is a deductible business expense. If you have used the rented car for business as well as personal use then you will need to work out the percentage of use for business and only deduct that as a business expense. The best and easiest way to split the cost between business and personal is apportioned it based on amount of time used for both.

Contractors can claim Childcare Vouchers through their limited company, subject to certain conditions. Please note that from April 2018 the Childcare Voucher scheme will be closed to new entrants; limited companies already paying childcare under the Childcare Voucher scheme can continue to do so, or the director can choose to switch to Tax-Free Childcare instead (you can’t use both schemes). Please see our blog on Tax-Free Childcare.

Qualifying Conditions of the Childcare Voucher Scheme:

1. The childcare must be registered or approved
2. The child
   • must be your child or stepchild whom you maintain either in full or in part; or
   • a child that lives with you and for whom you have parental responsibility; and
   • qualifies up to 1 September after their 15th birthday (or 1st September after their 16th birthday if they are disabled)
3. Your company’s childcare voucher scheme must be generally available to all employees

What counts as registered or approved childcare?

1. The childcare provider is registered under Part 3 of the Childcare Act 2006
2. Childcare provided by the governing body of a school if it takes place outside normal school hours and on school premises or premises covered by the inspection of the whole school activity
3. Domiciliary worker or nurse from an agency registered under the Domiciliary Care Agencies Regulations 2002 providing childcare in the child’s home
4. A relative, if all of the following apply:
   • He/she is a registered or approved childcare provider, and
   • The care is provided away from the child’s own home, and
   • The care is provided to non-related children in addition to the related child or children

What does not count as registered or approved childcare?

Childcare provided by a relative in the child’s own home, even if the relative is a registered or approved childcare provider. For these purposes a relative means a parent, step-parent, foster parent, grandparent, aunt/uncle, brother/sister, whether by blood, half blood, marriage or civil partnership.

What records does your limited company need to keep for the childcare voucher scheme?

1. Evidence that the scheme is offered to all staff where appropriate
2. Details of the child’s date of birth and where appropriate if the child is disabled
3. The relationship between the child and employee if the employee is not the parent
4. Details of the childcare provider’s name and registration/approval number and when, if appropriate, their registration/approval is due to expire
5. Evidence that employees are required to inform you of any change in circumstances in relation to the child or childcare

Exempt amounts for childcare vouchers and directly contracted childcare

The exemption applies to each individual employee, not per household or number of children. If the qualifying childcare support costs exceed the exempt amount, the excess will need to be paid for personally.

If you joined the childcare voucher scheme before 6th April 2011 you are entitled to £55 a week (or £243 per month).

If you joined the scheme on or after 6th April 2011, the exempt amount you are entitled to depends on your relevant earnings (please see below for definition):

• Not exceeding £35,000 – up to £55 per week, £243 per month or £2,915 per year
• Greater than £35,000 but less than £150,000 – up to £28 per week, £124 per month or £1,484 per year
• £150,000 or more – up to £22 per week, £97 per month or £1,166 per year

An estimate of relevant earnings must be made for the tax year that childcare vouchers are provided for. This excludes any earnings from other employments.

What are ‘relevant earnings’?

Relevant earnings do not include dividend income. For this purpose, ‘relevant earnings’ means any salary, wages or fees and any of the following:

• Guaranteed contractual bonuses,
• Contractual commission,
• Guaranteed overtime payments,
• Location or cost of living allowances,
• Shift allowances,
• Skills allowances,
• Retention and recruitment allowances, and
• Market rate supplements.

What if the childcare is paid directly from my business bank account (i.e. not going through a specific childcare voucher company)?

This is called ‘directly contracted childcare’ and the same exempt amounts apply as they do for childcare vouchers. This means your company can pay a childcare provider up to these amounts and you will not have to pay Income Tax or NICs.

Your company will need to write to the childcare provider about its intention to buy a certain amount of childcare. See below for an example of such a letter.

Where your company enters into such an arrangement with a childcare provider and there is an existing agreement between the provider and yourself/person concerned, HMRC would normally expect there to be a variation in that agreement to take account of the new arrangements in place between your company and the childcare provider.

Example Letter:

Specialist clothing bought for work – like a uniform or protective clothing can be deducted as a business expense.

Example of business clothes: Safety boots, safety jacket, overalls, helmets, clothes that have got the companies logo on or if you are a nurse, doctor, butcher, builder etc and you need to buy specific clothes for your job.

General office clothing like business suites are not tax deductible expenses.

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Computer consumables solely bought for the business e.g printer cartridges ets are deductible business expenses.

Computer equipment solely bought for the business e.g. Laptop, printer, fax machine, shredder or scanner are deductible business expenses. Businesses need these equipment to operate.

Software that is bought wholly, exclusively and necessarily for business purposes is a deductible expense. The software must not be for self-interest or personal use.

Example:
David is the sole director and shareholder of his accounting business and he recently had to incur the following expenses:

• Renewal of anti-virus software for all business computers
• Annual subscription fee for accounting software used
• Photoshop software for his photography hobby

David will be able to deduct the costs for renewing his anti-virus software and also the subscription for the accounting software as a business expense. He will not be able to deduct the cost of the Photoshop software as this is for personal or self interest use, not for business purposes

Cost incurred for business conferences are deductible business expenses

The director’s gross salary (Net salary plus employee national insurance and employer national insurance) is a deductible business expense.

You pay Income Tax on your earnings in the same way as other employees. However, your National Insurance contributions are worked out over an ‘annual earnings period’ – from 6 April to the following 5 April – rather than over the normal weekly or monthly periods that apply to other employees. This is to make sure you pay the right amount of National Insurance contributions.

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Qualifying charitable donations are tax deductible in your company (but only in so far your company makes profits, and only actual payments made during the financial year are allowable for tax). Please refer to this link for more information: More Information

If you are a higher rate earner it would be more beneficial for you to make a gift aid contribution in your personal name. The reason for this is because your higher rate tax band is increased with the grossed up amount of the donation contribution that you’ve made.

For example:

You’ve made a gift aid contribution of £800, so your higher rate tax band will increase with £1,000. This means you can earn another £1,000 of gross dividends tax free – that’s another £900 net dividend that you can receive without having to pay additional tax on dividends.

If your company makes a £1,000 qualifying charity contribution, it will get 20% tax relief. So, net cash outflow for your company will be £800. If you make the same gift aid contribution from your personal name, you only need to pay £800 to the charity for it to receive £1,000 (this is because the charity can get £200 through a Gift Aid tax repayment claim). So, the net cash outflow is the same for both, but the benefit of claiming it in your personal tax return is that you can take out another £900 from your company without having to pay personal tax on it.

It is important to make sure you pay enough personal tax to cover the Gift Aid claimed by the charity. Please refer to this link for more information: More Information

Personal tax payments include any of the following:

• Tax deducted from savings interest
• Tax on pensions
• Tax on investment or rental income
• Tax credits on UK dividends
• Capital Gains Tax

Employee’s gross salary amount is a deductible business expense.

Directors can claim costs incurred on eye test in the following circumstances:

• Eye tests that are required by health and safety legislation for employees who are required to use a computer screen or other VDU (visual display units)
• 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 can not be claimed on glasses or contact lenses that are used for everyday wear

Business flights are deductible business expenses as long it was taken solely for business reasons.

Example 1:
You are a contractor and you need to fly at your own cost to Australia to do some work for clients based in Australia. This flight was taken wholly, exclusively and necessarily for business purposes and it is therefore a deductible expense.

Example 2:
You are flying to Australia to attend a family wedding and while you are there you will be doing work that you would have done if you were in the UK. If you ask yourself was this flight wholly, exclusively and necessarily taken for business purposes then the answer is clearly no, so you can’t deduct this flight as an expense as it was not taken solely for business purposes even though you will be working while you in Australia.

Expenses incurred by the employer in providing periodic medical check-ups for employees or director are a deductible business expense. If a company incurs expenses in providing check-ups for members of an employee or director’s family or household this represents a benefit chargeable on the employee unless the family or household member is also an employee of the Company who provides the check-up.

If an employer provides an employee up to one health screening and/or medical check-up per year, the cost of provision is exempt from charge as an employment-related benefit as long as:

• the health screening is generally available to all employees, and/or
• the medical check-up is generally available to all employees, or to all employees identified in a previous screening as needing a check-up

Not all employees have to take up the option to undergo health screening and/or a medical check-up, but all employees must have the opportunity to do so. There is no requirement that all employees should receive the same screening and/or check-up, or that the screening/check-op should be made available at the same intervals for all employees.

“Health screening” refers to an assessment to identify employees who might be at risk of ill health. “Medical check-up” refers to a physical examination of an employee by a health professional which is limited to determining the employee’s state of health.

If the screening and/or the check-up results in the employee being provided with medical treatment, the exemption does not apply to any treatment that is subsequently made available.

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Insurance taken out for business purposes are deductible expenses e.g. Insurance for Office contents, Executive income protection, Key man life, Tax investigation, Professional indemnity, Public liability, Employers liability.

Again, if insurance is taken out for personal assets then it is not a deductible expense.

Interest paid on borrowings for trade purposes is a deductible business expense.

If your internet/broadband is NOT 100% for business use, then it should be part of your use of home claim. Please see the ‘use of home’ expense help for more information.

Magazines and books bought for business purposes is a deductible expense. This does not include books bought for personal use or books for self interest.

If your landline is NOT 100% for business use, then it should be part of your use of home claim. Please see the ‘use of home’ expense help for more information.

Lease rental agreements taken out in the business name is a deductible business expense. It often happens that a business will lease for example a photo copy machine instead of buying it, these rental lease expenses are deductible.

Necessary medical treatment incurred by an employer is deductible if incurred by the employee while the employee was working abroad, or borne by the employee and reimbursed by the employer, where an employee becomes ill or suffers injury while away from the UK in the performance of his or her duties, and of providing insurance for the employee against the cost of such treatment.

Keep in mind that you are both an employee and employer in your limited company.

If the subscription is for the benefit of the trade (wholly, exclusively and necessarily) then this is a deductible expense.

For Example:
An Optometrist have set up a business and she has got 2 subscriptions or membership fees, the one is the membership to the professional Optometrist body and the other is her monthly gym membership.

To be able to practise as an optometrist she needs to be registered with a recognised professional body and need to pay the annual subscription fee, this will be a deductible business expense as the optometrist can’t practise without the subscription or membership.

The monthly gym membership is not a deductible business expense as this is not wholly, exclusively and necessarily needed to operate her business, instead this is a personal expense.

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A director using his or her own car for business travel can claim £0.45 per business mile for the first 10,000 miles and £0.25 for each business mile above 10,000 miles as an expense per tax year.

If the director uses a motorcycle for business travel the deduction is £0.24 for all business miles in a tax year.

The 45p and 25p covers all your business related travel costs, Petrol, Insurance on the car, maintenance etc. so you can’t claim these expenses on top of the £0.45 and £0.25 allowance.

For Example:
Laura is a director of a Limited company and uses her own car to drive to her clients. In the tax year 11/12 (06 April 2011 to 05 April 2012) she drove a total of 12 500 business miles driven.

This means she can claim £0.45 as an expense for the first 10 000 miles and £0.25 for the 2500 miles over 10 000.

Total deductible business expenses that can be claimed = (10 000 x £0.45) + (2500 x £0.25) = £5,125

This means the business can refund Laura £5,125 for the tax year and this will be a deductible business expense.

No additional tax will be paid by Laura as long as she does not claim more than the 45 pence for the first 10 000 miles and 25 pence for business miles over 10 000 per tax year. Laura will need to keep an accurate log book of her miles that was for business e.g date travelled, from where to where and distance travelled.

deductible business travel must be to a “temporary workplace”. A “temporary workplace” is a workplace attended by an employee or contractor for a limited duration of time which is less than 24 months. It is important to note that a “temporary workplace” is no longer considered temporary from the day the employee or contractor expects to work at the same place for longer than 24 months. A contractor or employee therefore accepting a 30 month contract will not be able to deduct any mileage or travel expenses as this will not be a “temporary workplace” from day one.

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You have two options claiming for mobile phone expenses:

• Either you pay for it personally and the company reimburses you (but beware of PAYE/ NI charges), OR
• The contract is in the company’s name and the company pays the monthly bill directly to the provider (preferred option).

If the contract is directly between the company and the provider, then the full cost is an allowable expense paid directly by the business. One mobile phone provided for private use is exempt from a tax charge on Employment Income. The exemption covers the phone itself, any line rental and the cost of private calls paid for by the employer on that phone.

Phones used solely for business purposes are exempt, and there’s no limit as to how many of these phones you can have; as long as the private use is minimal.

If the mobile contract is not in the company’s name, then only the business call charges over the monthly phone tariff or PAYG charges for business calls can be reimbursed tax free.

Please see these HMRC links for more information:
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Employee and Employer National Insurance are deductible business expenses. Employee National Insurance and PAYE tax is included in the gross salary amount of an employee and director’s salary, so the gross salary (This is your net salary plus employee National Insurance and PAYE tax) plus employer National Insurance is a deductible expense.

If you are renting office space for the business then this is a deductible business expense

Parking fees while on business travel is a deductible expense. Again any fee that relates to personal use is not deductible.

For Example:
Adam had to drive to a client’s office for a meeting and he incurred parking fees while at the client’s offices. On the way back from the meeting Adam stopped at Tesco’s to do his weekly shopping and paid for parking there as well.

Adam can only deduct the parking fee paid while he was at the client’s offices as an expense. The parking fee paid while at Tesco’s was for personal reasons, not for business.

Cost incurred for patent royalties and copyright royalties paid in connection with an individual’s trade are deductible expenses.

Penalties and interest paid on late paid tax are NOT deductible expenses. Penalties paid to Companies House for late filing of financials is also not a deductible expenses.

Pension contributions is a deductible expense as long as the contributions are relative compared to the amount of salary earned. HMRC don’t give clear guidelines as to what it means with relative, so if you do have concerns about this, then you can always increase the amount of Gross salary you pay yourself to bring it more in line with the amount of pension contributions you would like to make.

You should carefully consider your options as your tax will be higher on an increased salary as you pay PAYE tax, Employer National Insurance and Employee National Insurance on your salary amount.

Costs for the repair of any business equipment e.g. computers/printers are deductible business expenses.

Costs incurred on stationery for the business is a deductible business expense. Costs incurred for any business material printing e.g. letters, flyers, posters etc. is a deductible business expense. Postage paid for business purposes are deductible business expenses.

Please note that you should not claim for petrol, you should rather claim mileage as this is more advantageous for you; and you can’t claim both as that would be double counting.

A director using his or her own car for business travel can claim £0.45 per business mile for the first 10,000 miles and £0.25 for each business mile above 10,000 miles as an expense per tax year.

If the director uses a motorcycle for business travel the deduction is £0.24 for all business miles in a tax year.

The 45p and 25p covers all your business related travel costs, Petrol, Insurance on the car, maintenance etc. so you can’t claim these expenses on top of the 45p and 25p allowance.

For Example:
Laura is a director of a Limited company and uses her own car to drive to her clients. In the tax year 10/11 (06 April 2010 to 05/04/2011) she drove a total of 12 500 business miles driven.

This means she can claim £0.45 as an expense for the first 10 000 miles and £0.25 for the 2500 miles over 10 000.

Total deductible business expenses that can be claimed = (10 000 x £0.45) + (2500 x £0.25) = £5,125

This means the business can refund Laura £5,125 for the tax year and this will be a deductible business expense.

No additional tax will be paid by Laura as long as she does not claim more than the 45p for the first 10 000 miles and 25p for business miles over 10 000 per tax year. Laura will need to keep an accurate log book of her miles that was for business e.g date travelled, from where to where and distance travelled.

deductible business travel must be to a “temporary workplace”. A “temporary workplace” is a workplace attended by an employee or contractor for a limited duration of time which is less than 24 months. It is important to note that a “temporary workplace” is no longer considered temporary from the day the employee or contractor expects to work at the same place for longer than 24 months. A contractor or employee therefore accepting a 30 month contract will not be able to deduct any mileage or travel expenses as this will not be a “temporary workplace” from day one.

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Costs incurred for professional fees are deductible as long as they were incurred solely for business purposes. Professional fees paid for personal reasons are not deductible.

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Costs for the repair of any business equipment e.g. computers/printers are deductible business expenses.

Costs incurred on stationery for the business is a deductible business expense. Costs incurred for any business material printing e.g. letters, flyers, posters etc. is a deductible business expense. Postage paid for business purposes are deductible business expenses.

Staff entertainment is allowable if it’s an annual party/function (e.g. Christmas party or summer barbeque) and available to all directors/ employees.

Directors/ employees are allowed to bring a guest.

Annual parties/functions are allowable if the total cost for the year per person (guests included) does not exceed £150.

Please note that the £150 is not an allowance. If the total cost per person goes over £150 then whichever functions best utilise the £150 are allowable. The others are taxable to the directors/employees and their guests, or have to be repaid to the company to avoid a personal tax charge.

Please read these HMRC links for more information:
http://www.hmrc.gov.uk/manuals/bimmanual/bim45033.htm and
http://www.hmrc.gov.uk/manuals/eimanual/EIM21690.htm

You basically have three options:

• Claim £4 per week (£3 per week before 6 April 2012, and £2 per week before 6 April 2008).
• Claim for the extra costs of gas and electricity as a result of using your home for work; as well as business phone calls and internet usage.
• Set up a formal contract for the rental agreement between yourself and your company for the space used for business. Please note that the rental income has to be declared in your personal tax return, and beware of the possible CGT implications.

Requirements for claiming use of home:

• use of home must be wholly, exclusively and necessarily for business purposes – it should be a requirement for you to work from home, and not merely a convenience.
• you can only claim for performance of duties that earn money for your service company.
• you should only claim for the additional costs incurred as a result of using your home for work.
• your contract should not specify that duties have to be carried out on client premises, or ban taking work off site. Ideally the contract with your client should require you to work from home.

You are not eligible to claim expenses for any of the fixed costs of running your home, i.e.:

• Council Tax/rates
• Rent
• Water rates (fixed water rates rather than a water meter)
• Mortgage interest
• Insurance

Relevant HMRC links:
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Contractors can claim travel costs incurred for business purposes. If travel costs are incurred for business as well as personal then the costs need to be apportioned and only the business portion of it can be deducted as an expense.

For the expense to allowable, it must be for travel to a ‘temporary workplace’. A ‘temporary workplace’ is one that is for a limited duration of time (less than 24 months). It is important to note that a ‘temporary workplace’ is no longer considered temporary from the day the employee/contractor expects to work for the same employer/client for longer than 24 months.

E.g. a contractor accepting a 30 month contract will not be able to deduct any mileage or travel expenses for the entire contract period; or a contractor having their contract renewed every 6 months has to stop claiming for travel expenses straight after the contract renewal taking the total contract time up to 2 years, so they’ll only be able to claim for travel expenses for 18 months.

Expenses for training are deductible where these expenses are incurred for the purpose of updating existing knowledge and skills, and not for the purpose of obtaining new knowledge or skills. In the case where the course or training is for personal development or for self interest then it is not deductible.

For Example:
John has got his own building business and John needs to do a health and safety course every year to comply with current legislation. John is also studying towards becoming a mechanical engineer.

The cost of the health and safety course is a deductible business expense, but the cost of the course in mechanical engineering is not a deductible expense. John does not need this qualification for his business, so the expense is not wholly, exclusively and necessarily for business purposes.

The same applies for example if someone who’s got his own bookkeeping company. The director will need to do some courses and training every year to stay up to date with changes in the industry and these courses will be deductible as it is business related. If the director is only partly qualified and wants to further his career by doing his CIMA qualification then this will not be a deductible business expense as the director will be acquiring new knowledge and skills with the CIMA qualification.

Fees for courses and training should be paid from the business bank account and invoices made out to the business.

Specialist tools bought solely for business purposes are deductible business expenses.

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Taxi fare is a deductible business expense only if it was wholly, exclusively and necessarily for business purposes.

What are business journeys?

You can only get tax relief on the cost of business journeys. These are when, as part of your job:

• you have to travel from one workplace to another – this includes travelling between your main ‘permanent workplace’ and a temporary workplace
• you’ve got to travel to or from a certain workplace because your job requires you to

Business journeys DO NOT include:

• ordinary commuting – when you travel between your home (or anywhere that is not a workplace) and a place which counts as a permanent workplace
• private journeys – which have nothing to do with your job

deductible business travel must be to a “temporary workplace. A “temporary workplace” is a workplace attended by an employee or contractor for a limited duration of time which is less than 24 months.

It is important to note that a “temporary workplace” is no longer considered temporary from the day the employee or contractor expects to work at the same place for longer than 24 months. A contractor or employee therefore accepting a 30 month contract will not be able to deduct any mileage or travel expenses as this will not be a “temporary workplace” from day one.

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Subsistence is allowable if in conjunction with business travel to a temporary workplace. Please see travelling expense for more details.

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