Managing Expenses for Contractors

All contractors incur expenses directly related to running their businesses. How contractors manage their expenses partially determines the total of their tax liabilities. Therefore, proper expense management is necessary in order to both comply with the law and lower the contractor’s tax burden as much as possible. I-CAS assists contractors through effective expense management.

Expenses and Tax Liabilities

Money used to meet legitimate business expenses is not subject to income tax. The first thing to understand is that your monthly tax burden will depend heavily on the expenses you have. A month with zero expenses will result in taxation of all revenues; months in which expenses are incurred will see taxation based only on the taxable portion of revenues. The contractor should keep in mind that PAYE, VAT and dividends will affect tax liabilities as well.

Paying for Legitimate Expenses

The average contractor will pay for legitimate business expenses out-of-pocket at the time these are incurred. Reimbursement is then made through either electronic transfer between business and personal accounts or by writing a cheque drawn on the business account. It is imperative that contractors save all expense receipts for record-keeping purposes. It is best to not mix business and personal expenses on the same receipt if possible.

Qualifying Expenses

If a company falls under the scope of IR35, qualifying expenses include business administration, travel and accommodation, professional subscriptions and memberships, and pension contributions. For more information about IR35 expenses, please contact I-CAS or consult the HMRC document Expenses and Benefits – A Tax Guide.

Limited companies established outside of the scope of IR35 are much easier to manage in terms of expenses. Contractors free of IR35 can claim nearly any expense that is wholly and exclusively the result of running one’s business. You can claim:

  • Travel Expenses – Travel expenses include any costs you incur to travel to and from a job site. For most contractors, travel expenses are limited to the mileage they accumulate driving to and from the place of work. The amount that can be claimed is calculated on a per-mile basis. You can also claim parking costs, the cost of public transport, and other qualifying expenses. You cannot claim parking or speeding fines.
  • Accommodation – The cost of overnight accommodation can be claimed if it is both reasonable and necessary to fulfil the terms of a contract. This may include some meals offered by the establishment providing the accommodation.
  • Meals – Claiming the meal allowance is tricky for contractors. Meals can only be claimed for periods when you are working away from your usual location and/or staying overnight away from home. You cannot claim normal, daily meals while working at your regular location and staying in your home.
  • Training – Contractors can claim training expenses, but only if such training is wholly and exclusively related to one’s ability to service existing contracts.
  • Pension Contributions – If your limited company offers a private pension scheme, you can lower your tax burden in two ways. First, any money contributed counts as a legitimate expense for your company. Second, you pay no income tax on any amount contributed from what is considered normal pay.

There may be other kinds of qualifying expenses for your business not listed above. The complexity of tax law is such that we recommend contractors work with accountancy companies, whether their business is set up within or out of the scope of IR35. Proper expense management can have a substantial impact on the contractor’s tax liability to the extent that take-home pay can go up or down proportionately.

Additional Considerations

Contractors should understand that they cannot claim expenses if they were never originally paid for or for which they have no means of verification. HMRC enforces this rule without exception. If a contractor cannot document his or her expenses properly, these cannot be claimed to reduce tax liability. Doing so is considered tax avoidance; it is punishable by law.

In light of this, contractors should avoid working with accountancy services or other companies promising greater take-home pay with no expense receipts required. Should HMRC determine that tax avoidance has taken place, it is the contractor who is held legally responsible, not third parties he is working with. The contractor will pay any tax penalties assessed.

Lastly, contractors need to make a concerted effort to save every receipt. Your accountancy firm may later determine some receipts are not necessary, but it is better to be safe than sorry. Your ability to lower your tax burden through legitimate expenses is dependent on your ability to provide documentation. Our mobile friendly accounting software allows you to take a photo on your phone of your receipts and send it straight to your account, which makes keeping track of your all your receipts fast, easy and safe.

I-CAS works with contractors to ensure expenses are managed correctly. We can help you as well, making sure your business is as profitable as it can be with the lowest possible tax liability. Contact us to learn more.