Tax and expenses (outside of IR35)

[boxingbantz]

Recently started my first contract which is outside IR35. I have an accountant etc but just wanted to ask a quick question on here, as I can't contact them today, regarding expenses.

When you submit an expense in every month with your accountant, with regards to your tax, how does this actually work?

Say, for arguments sake, I earnt £5000 (before tax) and submitted £500 of expenses every month - is this, in effect, £500 off of the tax I would be paying HRMC?

I know this is pretty basic and my accountant will tell me more but just so I have a rough idea how this actually works?

[Sockpuppet]

Best speak to your accountant if you're having trouble with this as its very basic. Tax is worked out at year end and is roughly 20% of the difference between profit and expenses.

e.g. bill 10000 in year, expenses are 2000. Tax is 20% of 8000.

[malvolio]

The OP is possibly making the usual newbie mistake of mixing up corporate and personal monies.

For the company it is as Sockie says. If, however, you are talking abut reimbursing your own business expenditure, it's effectively tax free if (a) you've actually spent the money - don't ever claim expenses you haven't incurred - and (b) it's wholly and exclusively for business purposes. In effect reimbursed expenses are paid before calculating PAYE/NNICs due.

The smarter move is to get a company credit card and usse that for business expenditure, so you never have to fork out your own money in the first place.

There are some good guides around that cover all this. The one over there ---> ain't tooo shabby, the definitive one is the recently updated Guide to Freelancing on the PCG website www.pcg.org.uk and both SJD ACcounting and Nixon Williams have useful financial guides. Read them all - especially the PCG one - and discover how much you don't know

[boxingbantz]

Thanks alot for the information, will check it out.

[Wanderer]

Say, for arguments sake, I earnt £5000 (before tax) and submitted £500 of expenses every month - is this, in effect, £500 off of the tax I would be paying HRMC?

No. I wish it did work that way!

Your company makes an income of £5,000 - £500 expenses = £4,500 profit. The company then pays £900 (20%) corporation tax on the profit leaving £3,600 which it pays to you as a dividend. It also pays you £500 to reimburse the expenses that you claimed from the company. You get £4,100 in your pocket.

So by claiming expenses of £500, you have reduced your corporation tax bill by 20% of £500 which is £100. If you didn't claim the £500 in expenses then you would get £4,000 in your pocket.

The bottom line is that if your company incurs an expense then 80% of that comes out of your pocket and 20% of it comes out of money that would otherwise be paid to HMRC.

That's a simplistic view of it. If you are a higher rate tax payer or IR35 caught then the percentage is higher because you are paying more tax.

If you are VAT registered and not on the flat rate scheme then you can claim back the 20% VAT (if VAT applies and it doesn't apply to things like train travel).

However, if you are on the VAT FRS and you make a capital purchase of >£2,000 then you can claim the VAT back.

[Waldorf]

Recently started my first contract which is outside IR35. I have an accountant etc but just wanted to ask a quick question on here, as I can't contact them today, regarding expenses.

When you submit an expense in every month with your accountant, with regards to your tax, how does this actually work?

Say, for arguments sake, I earnt £5000 (before tax) and submitted £500 of expenses every month - is this, in effect, £500 off of the tax I would be paying HRMC?

I know this is pretty basic and my accountant will tell me more but just so I have a rough idea how this actually works?

You might also find this useful? http://www.nixonwilliams.com/images/...es%20Guide.pdf