Contractor expenses - what can and cannot be claimed
Despite some contractors putting through a Doll’s House and the odd kayak, there actually needn’t be any confusion on what expenses can and cannot be claimed, writes Phil McDonald, managing director of umbrella company Paraplus.
That’s because HM Revenue & Customs clearly outlines that any expenses (with the exception of travel) must be a “wholly, exclusively and necessary expense” for the performance of business duties, and the contractor must always retain a VAT receipt.
When it comes to HMRC compliance, ignorance isn’t an excuse, but the good news is that understanding what you can and can’t claim as an expense needn’t be a headache. The following is an overview of the main groups of expenses for umbrella company contractors, which should make it even clearer.
When travelling to and from a temporary place of work you can claim for:
- Public transport (tube, train or bus tickets) – these can be claimed if they are solely for the purpose of work (-but please note, a Travel/Oyster card used partly privately would be claimable provided it is cheaper than the individual ticket)
- Taxis – these can only be claimed where they are necessary for the purposes of the employment
- Car/ Motorcycle – mileage can be claimed provided that you maintain an accurate record of all business-related journeys
- Bicycles – there is a mileage rate of 20p per mile, when you use a bicycle for a business-related trip
When it comes to business trips you can claim for:
- Plane/train/bus/boat - any tickets that are purely business-related
- Business travel during the trip – such as taxis to and from meetings. Do note that it is NOT acceptable to claim for travel expenses for personal reasons during the trip, such as sightseeing, shopping, visiting friends/family, etc
- It is fine to claim for business-related accommodation, provided the claim is for the contractor alone and that it was strictly a business requirement
- There are also “incidental overnight expenses” that can be claimed. These are expenses incurred over and above the accommodation and food costs of the business trip, for example, laundry. These expenses are limited to £5 per night within the UK and £10 per night internationally
It is fine to claim for protective or specialised clothing that is required to wear in order to do the job/perform the contract
- Hardware – contractors can claim for computer hardware they have bought, provided they can demonstrate that it has been purchased strictly for business purposes, with personal use being incidental
- Computer software – when it comes to software, it has to be looked at case-by-case and the onus is the contractor to prove it is strictly for business purposes and relevant to their current assignment
Journals and magazines
- A contractor can claim for any journals or magazines that are wholly required by the contractor’s current employment, with no private benefit
- Training and course books can also be claimed, but again only if these are wholly required by their current assignment to maintain their current professional status
Professional body membership fees
- Any claims must be wholly required by the contractor’s current employment in order to maintain their current professional status.
- Any membership fees claimed must be for professional bodies that are listed on HMRC’s Section 201 list
Temporary Accommodation/ Rent
- Contractors may claim temporary accommodation or rent costs provided that they can demonstrate the cost had to be incurred for the current assignment. They must be able to demonstrate they continue to incur costs on their main residence and can also only claim for actual time spent in the temporary accommodation during a working period.
- Contractors may claim these costs if they are staying with friends or family provided they pay and provide evidence in support
Telephone (Fixed Line/ Mobile)
- Only business-related calls can be claimed, the line rental can also be claimed for a fixed line, but only if all calls are business-related
- If a contractor has a mobile phone used purely for business, and they can clearly demonstrate this, then they could claim the monthly tariff of the business phone and the cost of those business calls. If they purchased the business phone they could also claim the cost of that phone
Please note - this article is based on the dispensation Paraplus has for its workers, and only provides an overview of the main groups of expenses for umbrella contractors.
The key point to remember is that for contractors, expenses are costs incurred by your work. Contractors should also keep in mind the ‘each and every holder’ rule operated by HMRC. This is an additional restriction in that an expense has to be incurred by each and every holder of the employment, whereby an expense that is something that applies to you will not succeed with HMRC unless it applies to everyone who holds or would hold that job.
More positively, there may be some flexibility as to when you can claim, such as weekly or quarterly, but contractors must keep records of expenses, which could include details of the date, description of the expense and the total amount. Given that the taxman can be quite unforgiving in this area, speak to your adviser if in doubt.
Editor's Note: Additional guidance for this piece was provided by Bob, the retired tax inspector.