Tax deductible expenses for contractors
Introduction and general points
This guide aims to provide a single resource for contractor clients of Caprica Online Accountants to understand which expenses are tax deductible.
The guide applies to contractors operating through a Limited Company and that fall outside of IR35 regulations only. If you are unsure of your IR35 status please contact us for an IR35 contract review.
Receipts should be kept to support all expense claims and in all cases expenses should be reasonable. For example, HMRC will not accept a £20 claim for lunch everyday!
The 24 month rule
The 24-month rule dictates where your normal place of work is. If you have been contracting at the same client location for 24 months then that location is deemed to be your normal place of work and you will no longer be able to claim expenses for meals at this location or for travel to this location.
This also applies if you have multiple clients in the same vicinity. For example if you have been working at Canary Wharf but for multiple clients over 24 months the rule will still apply.
The 24-month rule is forward looking. This means it applies as soon as it is expected that you will be at the same location for 24 months, whether firmly contracted or reasonably expected. For example if you have been working at a location for 18 months though a change to a project means that it will take a further 7 months to complete then you should cease making expense claims for meals and travel costs immediately.
Reasonable costs for hotel accommodation can be claimed as an expense when working away from home.
Actual expenses for an annual Christmas party may be claimed up to a limit of £150.
No clothing may be claimed for if it could form part of an ‘every day’ wardrobe whether or not you would choose to wear it in a personal capacity. For example a business suit may not be claimed whereas protective clothing for use during work only could be claimed.
IT & office equipment
IT & office equipment may be deducted from profit (through capital allowances) to the extent that they are used for business purposes. If, for example, a laptop is used only 50% for work purposes then only 50% of the cost may be claimed.
Flat rate claims are not permitted to contractors operating through a personal services company.
When working at a remote site or when staying away from home overnight claims can be made for actual meal costs. This includes your main place of work if the 24-month rule does not apply to you (see above).
Training costs relevant to the performance of your duties may be claimed.
Travel costs to and from a temporary place of work (see 24-month rule above) are allowable expenses:
- Mileage rates are 45p per mile for the first 10,000 miles and 25p per mile thereafter. If you are driving a passenger you may claim a further 5p per mile (rates correct for 2011/12 tax year). Records detailing location travelled to and miles travelled must be kept for each claim.
- Parking, congestion charge and public transport costs can also be claimed with a valid receipt.
- Parking fines or speeding fines may not be claimed.
It is rarely beneficial to purchase a company car through your limited company. We would only recommend it when the car is extremely fuel efficient (as fuel efficient cars receive tax benefits).
Use of home as office
A flat rate fee of £4 per week may be claimed by contractors.
If it can be proven that marginal costs, that is the additional home costs suffered due to working from home, are more than £4 per week then the marginal cost may be claimed.
The burden of proof for such a claim is high and we would only suggest that these costs be claimed if the potential tax saving is significant.