Claiming expenses as a contractor is a great way to use costs from the running of your business to reduce your tax bill – tax is calculated on profits, and since costs reduce your profits you’ll pay less tax.
You need to have actually incurred any expenses you claim. If HMRC ever decide to carry out an investigation into your business, you’ll need to prove that your expenses are real by showing the records – that means keeping all your receipts.
Avoiding tax avoidance
If you claim any expenses that you haven’t actually incurred, HMRC could see it as tax avoidance. You also need to remember that although claiming expenses as a contractor reduces your tax bill, it isn’t a method of avoiding tax.
You also need to keep all your records and paperwork for at least five years.
What expenses can you claim?
Below is an overview of the types of costs of running your contractor business you can claim as expenses to reduce your tax bill.
If you need to buy any clothing that is essential to completing a contractor job, such as steel toe-capped boots or hard hats, or clothing that protects your normal clothes while you work, you can claim it as expenses.
You cannot claim expenses for clothing that you could also wear outside of work, such as a suit or even a jumper emblazoned with a company logo, nor can you claim for costs of dry-cleaning or alterations.
HMRC are quite strict on claiming expenses for training. You can only claim expenses for training that is relevant to performing the duties under your current contract.
That means if you’re a contractor training in new skills in order to diversify your business, you can’t claim the cost of this training as an expense.
Claiming expenses for the cost of equipment is similar to the rules for training – you can only claim expenses for equipment that is relevant to your current contractor job. You cannot claim expenses on equipment for your business in general.
As a contractor, you’ll usually be travelling from home to various temporary work places. You can claim 45p per mile of travel for the first 10,000 miles per year, and 25p for each mile above this threshold. You can claim for parking and congestion charges too, but not speeding or parking/car pound fines.
This is lowered to 24p per mile if you travel by motorbike, and 20p per mile if you travel by bicycle.
You can also claim for public transport costs – make sure you keep the receipts.
Food and accommodation
If you need to stay in a hotel in order to complete a contractor task you can claim the costs of your stay, as well as the associated costs of food and drink. These costs must be ‘reasonable’, though there are no set allowances for accommodation.
As a contractor/business owner, you’ll likely be paying fees and subscriptions to professional bodies. You can claim expenses on these kinds of subscriptions.
If you want to give any money to a charity, the Payroll Giving scheme allows you to pay from your salary before any tax has been deducted, enabling you to contribute to a good cause while reducing your tax bill.
Claiming expenses as a contractor
As a contractor, you probably just want to spend your time finding jobs and then doing those jobs. Making sure you keep proper records and receipts is going to be annoying when you first start, but keep with it, because paying less tax is worth the extra work.
Shoaib Aslam is the co-founder of Pearl Chartered Accountants, a UK-based chartered accountancy firm that has multiple locations across London. They are experts in helping startups and established businesses with all aspects of growth, strategy, scaling up, accounting and tax planning.