Being a contractor means that you are required to pay out for a number of costs in order to keep your business running.
However, this isn’t all bad news, as you will be entitled to claim some of this money back through expenses, which will in turn reduce your tax bill at the end of the year.
Of course, HM Revenue & Customs (HMRC) do have rules in place to prevent people from trying to claim expenses for items that are nothing to do with their business, and so it’s important to realise that everything you wish to claim for must be a ‘wholly, exclusively and necessary expense’ made entirely for business reasons.
What can affect my expenses?
Not every type of contractor will be able to claim for the same expenses; there will be many circumstances that could potentially affect what you are entitled to claim for.
For example, whether or not you’re registered for VAT can affect the amount of allowable expenses you are entitled to. If you are registered you can generally claim back any VAT that you had to pay when buying goods or services for your business.
The way in which you trade will also make a difference, because working through a limited company, as opposed to an umbrella or as a sole trader, will essentially mean that you are able to claim on a much wider variety of expenses.
The same goes for if your contract is caught by the IR35 legislation, as being ‘inside’ this means that you are not entitled to claim for as many expenses; this is due to the fact that you are not seen as having the same responsibility or risk levels as other contractors.
What is an allowable expense?
We’ve discussed the different factors than can affect what you’re allowed to claim back for, but what exactly is a legitimate expense?
As a contractor, there will be a number of business-related expenses that you will need to pay out for. Here are some examples of what is considered an allowable expense:
•Accountancy, legal and other professional fees – such as accountants, solicitors and surveyors.
•Business advertising – newspapers advertisements, directories etc.
•Travel expenses – either public transport or your own car/van
•Office costs – such as small equipment, stationary, internet and mobile costs.
•The rent, rates, power and insurance costs of your business premises or a percentage of your home bills should you work from home.
There will of course be plenty more expenses that you may be entitled to claim for and so the best way to work this out is with the help of an accountant who specialises in contractor tax.
It is very important that you hold on to any receipts for items that you wish to claim for. You must be able to prove that you are keeping to the rules set out by HMRC and are not trying to make a claim for expenses that were not made for the running of your business – especially when it comes to expensive items.
When it comes to reclaiming VAT, you will also need to ensure that you keep hold of any VAT receipts.
It’s advised that you hold onto any proof of purchase for a minimum of six years, as HMRC can go as far back as this should they suspect a business claim isn’t genuine.