What expenses can you claim back?

There is a wide range of limited company contractor expenses that can be claimed back. These expenses can be used to reduce a company’s profitability in its accounts – this reduction in profit bring down the size of a corporation tax payment.

Capital allowances for contractors – purchased items

All sole traders, partnerships, and limited companies (including contractor limited companies) may spend up to £200,000 on capital items. This is called the Annual Investment Allowance. Capital items include office furniture, cars, computers, tools, software, and more – items which have a long-term usefulness for the purposes of trade.

Capital items bought for a limited contractor company must only be used for business reasons and not for personal reason (for example, a laptop).

All capital expenditure under £200,000 may be listed as “revenue expenditure” on financial accounts meaning that the total value of the items reduce the level of profit made, thereby reducing any resulting corporation tax obligation.

Note – the capital allowance will be increase for 2 years from 1 January 2019 to £1,000,000

Note – capital allowances for cars and vehicles depend on CO2 emissions

Capital expenditure – on lease or hire purchase

If a company buys a capital item on hire purchase or if the company leases a capital item, then the amount paid in interest and on the lease part of any payments counts as “revenue expenditure” meaning that it can be used to reduce corporation tax.

Clothing

Only clothing which is used “wholly and exclusively” for the purposes of business or a staff member’s employment is allowable. For example, protective clothing on a building site or within a chemical factory is permissible however clothes that can be worn for work and for leisure are not.

Training

If a director or a member of staff of a contractor limited company is sent on a training course which better equips the company to be more competitive or which imparts new knowledge to an employee or employees, training is 100% allowable if paid by the company or paid by the director who is then reimbursed by the company.

Communications costs

Business communication costs are allowable expenses – these include telephone lines, call charges, stationery, printing, photocopying, broadband lines, and so on.

If these accounts are held in the name of and paid for by the contractor limited company, the costs are 100% allowable. However, if the accounts are in the name of the director, then only part of the costs may be allowable.

Business entertainment

Entertainment is not normally an allowable expense. Claims can not be made for entertaining customers, suppliers, and clients nor can they be made for corporate hospitality.

Companies have a yearly budget of up to £150 including VAT per staff member to spend on entertainment – including food, drink, travel expenses, and accommodation. Most companies spend this on Christmas parties however a company can choose to spread the entertainment budget over a year. However, if more than £150 is spent on a staff member, then it becomes a benefit-in-kind and it will be liable for income tax, Employee’s National Insurance, and Employer’s National Insurance.

Subsistence

Subsistence is the term used by HRMC to describe providing oneself with food and drink at a minimal level solely for the purposes of carrying out business.

It is not considered as subsistence if a contracting limited company director or employee consumes food or drink at home or within the workplace as this consumption is done for the “purpose of survival”, the term chosen by various different tax tribunals on the subject. Subsistence is the cost of meals, drink, and accommodation away from the normal place of work – for example, as would happen on a business trip.

To qualify as a business expense, the travel undertaken which required a contractor or employee to eat and sleep away from their home or work premises must have been done so “wholly and exclusively” for the purposes of trade. This includes trips made to suppliers, to clients, to different work sites, to events, and to attend training courses.

If a contractor and their staff members (that is, someone on the payroll with an employment contract with the company) are away on business and the company pays for the meal, this is allowable as subsistence. Expenses incurred must be “reasonable” and at a “minimal level”. A reasonably priced meal in the hotel or at a local restaurant will normally be fine.

Contractor expenses when working away from home – travel costs

A contractor may claim hotel accommodation costs for nights spent away and for the cost of a rental property if the costs are incurred exclusively for business purposes.

For contractors and their staff using their own cars, they can claim 45p a mile for the first 10,000 miles and 25p thereafter. For motorbike users, the amount is 24p per mile regardless of the number of miles.

Hire car expenses, rail travel, air travel, tolls, taxi and bus fares, parking charges and congestion charges are allowable as long as the expenses are incurred wholly in the pursuit of business.

The cost of travelling to locations which aren’t a contractor or their employee's normal workplace is allowable, subject to the 24 month rule and the 40% exception rule.

Beware the contractor 24 month rule

When working for a client, a contractor cannot claim travel expenses once the work for a client has gone on for longer than 24 months or if an extension has been granted to previous work which would take the cumulative time spent with the client over 24 months.

The 40% exception rule

Contractors can disregard the 24 month rule if they spend 40% or less of their time at a workplace as long as that workplace is temporary.

Additional allowable expenses

Although not exhaustive, the following items also qualify as expenses for corporation tax purposes:

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