Contractors' Questions: Can I put shoes, suits and lunch on expenses?
Contractor’s Question: I am a new IT contractor whose contractor colleagues say they claim back the costs of suits, shoes, and lunch under expenses. Are these items of expenditure genuinely allowable?
Also regarding my contractor expenses, although I have opened up a business account, can I transfer money into my other current account for my day-to-day expenses, as normal, or do I need my accountant to do it every time?
Expert’s Answer: Understanding what expenses can be claimed as a tax deduction is one of the simplest ways to reduce tax and therefore increase the amount available to you personally. Tax relief for expenses works by reducing the amount of profit your company must pay tax on. The tax relief therefore reduces the corporation tax eventually paid by your company to HMRC.
Where expenses are paid personally by you and incurred in order to perform your employment (with your company) the expenses can be repaid directly to you by your company. The company claims the expense as a deduction from profits on which it pays tax and you do not have to pay any tax on the amount repaid to you.
Repaying expenses is therefore as simple as transferring money from the company bank account to your own. It is always important to keep proper accounting records so make sure that the transfer is supported by an expenses claim and receipts or evidence of what the expense is and why it was incurred. You don’t need your accountant’s approval or involvement to make this payment!
A word of warning though: if the company pays you any amount for expenses that were not incurred to perform your duties, the payment to you will be personally taxable; and often may need to be paid under PAYE. The formal test is “wholly, exclusively and necessarily incurred in the performance of” your job. This test is rather restrictive at times especially where the cost has both a personal element and a business element. This is called ‘duality of purpose.’ Where duality exists the “wholly and exclusive” part of the test can fail.
With regard to your scenario, it is quite common for colleagues to provide varied advice on the matter of expenses and there can be a whole variety of claims that are made that quite simply would be disallowed if HMRC was aware. Just because one person makes a claim does not mean that it’s right, nor that the same circumstances apply to you. So it is always recommended to seek advice from a suitably qualified person, i.e. an accountant or tax adviser, who will be able to provide specific guidance around legislation and HMRC’s point of view.
You ask about shoes and suits. Clothing is a question that often is asked and is a good example of where the duality test may fail, as clothing is worn for personal decency as well as perhaps in connection with your job. Some items are allowable, for instance;
- Protective clothing while on-site, for example, or perhaps steel toe capped boots, or a high-visibility jacket.
- A company uniform, which can be used to indentify your profession, commonly this would be medical clothing, security guards.
However the cost of suits and shoes would not be an allowable deduction because these clearly have a personal element to their use. The simple test, as a guide, would be whether a stranger would recognise that you were wearing a uniform.
Lunches, which for expenses purposes are referred to as ‘subsistence,’ is another example of costs that have a personal element. To provide some certainty, HMRC has set out two areas to consider.
Firstly was the subsistence cost incurred whilst commuting to your normal or permanent place of work? The only permitted claims are for lunches while you are travelling to, or working at, a temporary workplace. What is temporary has been very clearly defined by HMRC as a place that is not your only workplace and is not expected to be a place of work, for 40% of your working time, for more than 24 months.
For most contractors working through their own personal service companies, their home is usually the permanent workplace. Therefore travelling to a client site is usually temporary until it can be predicted that the 24-month rule will be exceeded.
The second test is whether a cost has actually been incurred during that journey.
HMRC has provided the opportunity to claim flat-rate expenses for subsistence as an alternative to the actual expense, and provides guidance on reasonable flat rate amounts that can be claimed; these are
- Breakfast (leave your business address before 6am) - £5
- 5 to 10 hours - £5 for a one meal rate
- 10 hours or more - £10 for two meals
- Late evening meal (working until after 8pm) - £15
However the breakfast and late evening meals are only for exceptional circumstances and not where there is a regular early or late work pattern.
In addition, you must retain evidence that a cost was incurred; usually this is a condition for HMRC to approve your request to use benchmark rates.
In future, bear in mind that from 6thApril 2016 the rules on expenses are changing. We believe that most umbrella companies will no longer be able to reimburse expenses gross to their workers. Umbrella workers will have to claim tax relief for expenses via their personal tax returns and these claims will be tested more rigorously by HMRC.
There are also new rules under consultation that, if they proceed, will limit the scope for travel and subsistence expenses to circumstances where there is no right of Supervision, Direction or Control over the worker. Only time will tell how this impact each individual.
The expert was Louisa Drewett, personal tax accountant at Intouch Accounting.
Editor’s Note: Related Reading –