In the UK, there are various ways that a contractor can conduct business, and depending on how you operate your business, you can claim various different expenses for tax purposes. On this page we look at the business expenses that a contractor can claim for if they are trading as a limited company that has been registered with Companies House.
If you are trading as a limited company, the expenses that you can claim will depend on whether you are caught out by the IR35 rules or not. IR35 is a piece of tax legislation rule that came into effect as of April 2000. The main idea behind the IR35 tax rule for contractors is that HMRC are able to tax some contractors as though they are employees of their clients, and it was brought in to prevent people from working under a ‘self employed’ mask when in fact they are working solely for one company, which means that they should be an employee.
Contractors outside of IR35 rules
If you are a contractor and have not been caught out by the IR35 rules, there are certain expenses that can be claimed for. These are:
- Your gross salary. Most contractors will be paid a low salary and the rest of their income will be made up of dividends in order to keep tax bills lower.
- The salary of your spouse so long as the salary is relative to the duties carried out.
- Any travel expenses in relation to your business, as well as business mileage if you own your own vehicle and use it for business purposes.
- Accommodation if this is required in relation to a contract. If you have to stay away from home for several nights to complete the contract work, you can claim for this.
- Telephone call costs for business related calling only.
- Any books, study material, courses and subscriptions or memberships to organisations relating to your business.
- Charges and interest incurred through your company bank account.
- Your pension scheme if this is a HMRC approved scheme.
- Value added tax relating to your expenses if you are VAT registered.
- Any insurances required for your business.
- Costs for information technology including computers/laptops and software.
- The costs of hiring a contractor accountant.
Contractors caught by IR35
Contractors caught by IR35 are only able to claim certain expenses, which include:
- Gross salary. For contractors caught by IR35, the low salary and dividends income is not allowed, and your income must be calculated within the IR35 rules.
- Business expenses that are directly incurred as a result of the contract work.
- Travel expenses depending on the terms of the contract between you and the client.
- Administration costs, which are allowed to be claimed up to 5% of the gross amount payable by the client.
It is important that you claim for the right expenses depending on your circumstances as if you get it wrong, you could end up with a hefty fine from HMRC.