Limited Company Expenses: The Basics
As a limited company contractor, you will be able to claim expenses for any costs that you incur as a direct result of your business. These are limited company expenses such as for travel (mileage/public transport costs), sustenance (lunch, food or drink) and accommodation (hotels etc.). Your Qdos Client Manager will be able to advise as to what you can and can’t claim back as a business expense while this guide to expenses will help answer some common questions.
Key Points of Expenses
- Throughout the duration of a contract, a freelancer/contractor will have to pay expenses, and then reimburse themselves from their limited company.
- Expenses aren’t taxed, and because of this, each expense must be justified. HMRC may take an interest in a company’s expenses, and if this is ever the case, evidence must be provided that the company actually incurred the expenses. This is usually achieved by keeping receipts and logging payments.
- HMRC state that expenses can be claimed provided they are ‘wholly and exclusively for the purposes of your business’.
- As of 6th April 2016, contractors will not be able to claim expenses relating to travel and subsistence when IR35 applies to a contract.
What can I claim as limited company expenses?
Below is a short list of some of the most common limited company expenses a contractor may incur.
- Meal allowances: A limited company professional is eligible to claim meal costs whilst working away, however, day-to-day meal costs are not permitted to be claimed back as expenses.
- Entertainment: Business entertainment is a disallowable expense for corporation tax purposes, however staff entertainment can be claimed as a business expense. Your limited company can pay for any annual event with no personal tax implications if the total of all events does not exceed £150 per head. So you could have a Christmas Party and a Summer BBQ, and both would be allowable for Corporation Tax purposes provided the collective total doesn’t exceed the £150 per head limit (just £1 over would make the whole amount a benefit in kind). The costs can include food, drink, tickets to events, accommodation and a taxi fare home.
- Travel expenses: As a contractor, a professional can claim the cost of travel to and from a temporary place of work. Mileage rates differ, but the allowance is to cover fuel and running costs of a vehicle. There are also other travel expenses such as parking and toll rates that can be claimed back.
- Accommodation: Temporary accommodation (hotels, B&Bs etc.) is a very common business expense for self-employed contractors. As contractors work on a temporary basis, ‘on the road’ accommodation is often necessary, and the Revenue recognise this as a valid expense.
- Training: Professional training that is relevant to a contractor’s profession is an acknowledged business expense. HMRC have been known to reject ‘skydiving lessons’ as in fact unacceptable as appropriate training for an IT consultant, so be warned.
Other common business expenses include:
- Company formation
- Accountancy fees
- Postage and stationery
- Business mobile and calls
- Employer’s N.I. contributions
- Pension contributions
- Computer software
- Technical books and journals
- Use of a home office
- Company bank charges and interest
- Protective clothing and/or uniforms
The 24-Month Rule
You may be able to claim expenses relating to travel, accommodation, subsistence, and incidentals when working at a temporary workplace, defined as a place of work visited for a limited duration or purpose.
However, by nature, contractors will often work at the client’s site which may differ with each contract and as such do not have a regular place of work, in which case the temporary workplace is determined by geographical area. So even if you have a change of contract, but stay in the same area to carry out your work, the expenses would not be allowable. There has to be a substantial change to your journey for you to re-claim these expenses again.
There is an additional rule that prevents a workplace being classed as temporary, where you attend the site (or geographical area in this case) over a period that lasts more than 24 months, or is likely to last over 24 months. The test is whether you will spend 40% or more of your time at a temporary workplace for more than 24 months. If you do, then it will no longer be classed as a temporary workplace and will as such, be regarded as a permanent place of work, restricting your ability to claim the relevant expenses.