Expenses without the scandal: tax deductible expenses for IT contractors
Most IT contractors would almost certainly cite ‘financial control’ as a major consideration in opting for an independent career, and a thorough understanding of tax-deductible expenses is an important factor in achieving that control and maximising your profit.
First, some fundamentals. For IT contractors working outside IR35, expenses administration is part of taking care of the bottom line, helping to ensure that your outgoings – specifically, your tax bill – are as small as possible. Remitted expenses are deducted from gross turnover, reducing the tax that would otherwise have been payable.
IT contractors working within IR35 will find that only a very limited set of expenses are reclaimable, principally travel/accommodation and some administrative fees. As always when a contract falls within IR35’s remit, obtaining professional advice is highly recommended.
Key to successfully managing your expenses is understanding what counts as reclaimable business expenditure (allowable expenses). Though expenses vary widely, they all have characteristics in common:
- they are incurred “wholly, exclusively and necessarily” in the course of your business;
- they can be supported by appropriate evidence (e.g. receipts; mileage records).
While there is a small amount of flexibility in the system, these conditions should be considered an acid test. Very few expenses that do not fully satisfy both these criteria will be considered valid by the Revenue. More information from HMRC on the definition of business expenses can be found here and here.
Provided that it meets the basic criteria, almost any item of day-to-day expenditure is a candidate for an allowable expense (sometimes referred to as ‘Schedule E’ expenses, though Schedule E itself ceased to exist in 2003). Some commonly reclaimed items include:
- business mileage and other travel costs, including to and from a temporary workplace;
- accommodation and subsistence;
- business phone calls;
- where your work involves the use of display screen equipment, regular eye tests;
- training and professional development where directly related to your business;
- subscriptions to approved professional organisations and periodicals;
- stationery, computer consumables and software.
One-off payments such as limited company set-up costs, and administrative expenditure such as accountant’s fees and bank charges can also be treated as an expense. Some of these items – which only represent a few examples of the types of expense that can be reclaimed – require clarification. Business mileage, for example, is not just a question of reclaiming your fuel costs. If you use your own car to travel on business, then the first 10,000 miles travelled in each tax year can be claimed at one rate (currently 40p/mile – latest rates can be obtained from the HMRC website with any subsequent travel reimbursed at a lower rate (currently 25p/mile). Obviously, this commits you to careful record-keeping. ‘Temporary workplace’ also has a specific definition – if you work or expect to work continuously at a site for more than two years, it cannot be considered temporary and you may not claim travel or subsistence costs.
If you carry out some or all of your work from home, then you may be able to offset the expense of maintaining a home office. However, to justify a claim for more than the nominal amount that HMRC deems representative of a basic home working arrangement (currently £3.00/week), your office should be a permanent, dedicated resource – a desk in the corner of the living room will not do. You will also have to show that your claim includes only specifically work-related expenditure – costs which you would have incurred anyway, such as telephone line rental, cannot be reclaimed even as a pro rata amount.
Seven Habits of Highly Successful Expenses Claims
Though expenses may be beginning to sound like more of a headache than they are worth, following a few simple guidelines can considerably simplify the process.
1. Log all business expenditure as soon as possible after the event, noting the contract and business activity that the expenditure related to;
2. Retain all receipts, cross-referenced to your business expenditure log;
3. Keep a detailed business mileage log;
4. Be aware of the ‘red flags’ that HMRC look out for – excessive mileage or subsistence, large phone bills, high home office costs and so forth – and ensure that your claim satisfies the “wholly, exclusively and necessarily” test;
5. Be particularly wary of ‘duality of purpose’ - an expense that has both a business and a personal component, for example a business trip abroad which you enhance with some sightseeing. If there is any suspicion that the expense might not have been incurred if it were not for the personal benefit, it may be disallowed;
6. Get to know your P11D form. If your records and receipts are clear and up to date, you will find completing it to be far less of a chore.
7. As always, take advice – your accountant is your best resource if you are unsure of the validity of any item. Properly managed, expenses are the classic case of ‘looking after the pennies and letting the pounds look after themselves’. While often individually insignificant, the savings that they represent across the whole of your business and the entire tax year – for the cost of a small administrative overhead – can be dramatic.
Editor's note: Further reading - IT contractor expenses and travel expenses