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Contractors running their own limited company can claim tax relief for business expenses in the same way as any other small business.
HMRC do not have a ‘list’ of what business expenses are allowable. The tax laws themselves set out a basic requirement that the expenditure must have been incurred ‘wholly and exclusively for the purposes of the trade’.
This means that any expenditure which has a mixed business and private use (or ‘dual purpose’), strictly does not qualify. However, this rule is modified where it’s possible to identify and apportion expenditure between business and private use.
The tax rules expressly deny entertaining expenses and normal accounting rules require that items like buildings, cars, machinery etc are not deducted from profits but treated as business assets. Such assets may be eligible for tax relief under a separate Capital Allowance code of rules.
Most limited company directors will have several common types of expenditure and we take a look below at how they may or may not qualify for tax relief. It’s important to remember that as a limited company director you are an employee of your company and that you are not a ‘sole trader’.
For many contractors, by far the most regular expenses claimed are mileage and other travel costs. You can normally claim all travel expenses to and from your temporary place of work.
Significantly, you can only claim as long as you expect to work at that location for no more than two years. If you've been working on a contract for 20 months and it is then extended for another six, you stop being eligible to claim mileage expenses from the minute you find out you'll be spending more than 24 months in one place.
That said, if you spend less than 40 per cent of your typical working week in any one place, you can keep claiming travel costs for regardless of how long you stay there.
The amount you can claim for mileage is 45 pence per mile for the first 10,000 miles in a tax year and 25 pence per mile thereafter. This rate is an approved mileage rate set by HMRC, the rate covers all car related costs such as fuel, insurance, servicing etc. So your other car related costs cannot be claimed in addition to the mileage rate.
Your company can claim for premiums paid on policies covering public liability insurance, employer’s liability and professional indemnity.
If your company was to pay for your personal life insurance, although it may be allowable if it was part of your directors’ ‘remuneration package’ under your employment contract with the company, it would create a taxable benefit in kind for you.
If your company engages an accountant to prepare its annual accounts, to run its payroll, file its VAT Returns or provide business tax advice etc, the fees incurred are tax deductible.
Fees paid to complete your Self Assessment Tax Return cannot be claimed as they are not related to your company’s business.
Phone bills and internet connection fees can be claimed as a limited company expense providing that the contracts are in the company’s name.
If you have a phone under a personal contract you will need to identify and apportion the charges between business and private use. This is what was described earlier as being ‘dual purpose’ expenditure, but which can be split to identify what is for business purposes and claimed accordingly.
If you have employees working for the company, including yourself as a director, the company can claim a deduction from its profits for the cost of the salaries and employer’s National Insurance Contributions.
If you engage any family members as employees remember that their salaries should be at a commercial rate for the duties which they perform. If they are excessive for the work done, then they will be seen by HMRC as not being ‘for the purposes of the trade’ and will be disallowed.
If your limited company runs out of its own business property or serviced office, the cost of maintenance, rent or service charges can be claimed.
If you run your business from home, you can claim a percentage of the cost of using your home (the ‘dual use’ principle again) based on the utility bills, what rooms are used, and the time spent in them. However, many contractors find it easier to claim the HMRC approved rate of £6 per week as a company deduction.
Membership of professional associations and trade bodies is an important way in which individuals and businesses remain in touch with developments in their sector.
Your limited company can claim tax relief on the cost of paying its employees’ and directors’ professional subscriptions without the individuals incurring a benefit in kind tax charge.
Payments of fees for gym or golf club memberships would, however, not escape the benefits charge!
Once you have set up an arrangement with a pension provider your limited company can make payments into your pension pot and claim tax relief on the whole of the premiums paid.
There are annual limits on how much you can pay or have paid into a pension (currently £60,000 pa) so check with your financial adviser before doing so.
Professional development and training courses can be claimed as limited company expenses.
There are special rules which exempt the costs of such eligible training from creating a tax charge on the employee or director. These include the proviso that the training is designed to enhance, improve, or reinforce existing skills which are likely to help the individual develop and perform in their existing role.
Training for additional qualifications is unlikely to qualify but the circumstances of the claim may need to be examined to check for eligibility.
In all cases the training must be paid for by the company or reimbursed by the company to the employee or director.
Your company may be running an advertising campaign in a trade or sector magazine or incurring costs online, through social media etc. Providing the objective is to obtain business then the cost can be claimed as a tax deduction.
Website development and maintenance costs may also be allowable provided they meet the ‘wholly and exclusively’ test mentioned earlier.
Items purchased by your limited company like a laptop, printer, scanner etc can be claimed as revenue expenditure meaning that 100% of the cost can qualify for tax relief when it is incurred.
If your business rents a van, it is likely to be able to claim the costs of rental as a tax deduction. However, if it buys a van exclusively for business use, the cost may be eligible for a 100% deduction through the Annual Investment Allowance scheme. This is a form of Capital Allowance which applies also to plant and machinery used by a business.
If your company has business loans or charge cards on which interest is payable, those charges can be claimed as a tax deduction. Likewise, any bank charges or overdraft fees on a business account are allowable.
If your company provides, maintains, and replaces protective clothing and uniforms because it expects them to be worn for business activities, a tax deduction can be given for the costs incurred.
Beware that the costs of everyday clothing like business suits and casual wear don’t qualify!
Finally, please ensure that you and your limited company retain proper records of expenditure to support any claims for tax deductions. These can be paper or electronic receipts with appropriate descriptions.
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