how much of expense is returned ?

**Wanderer** · 4 January 2013, 03:51

Originally posted by contractor0118 View Post

I’m new to contracting and have a question about expenses, Lets say I charge client £10,000 VAT in year 1.
And here are my expenses for year one…
£1,000 accommodation and travel
£3,000 others
Do I get to keep £4,000 of the VAT and return 6,000 to the tax man?

Wow, it would be nice if it did work like that!

Sorry but the answer to that question is NO!

The confusion often arises because expenses which are paid to an employee by an employer are in addition to your salary and are not taxable. You can go large on your expenses and it costs your employer money, not you. However, as a self employed business person operating a LTD company, you are the owner of the company so any expenses paid to you by the company come out of the company's profits which is ultimately out of your pocket.

Basically what happens is that the company pays 20% corporation tax on it's profits. Allowable expenses reduce your company's profits, thus reducing the amount of tax the company pays. So the £4,000 expenses will reduce the corporation tax bill by £800 meaning that the net cost to you of spending £4,000 on expenses is actually £3,200. When you incur an allowable business expense, 80% of that comes out of your pocket and the tax man pays the other 20%.

It's actually quite a bit more complicated that that and the exact amount depends on your turnover, flat rate VAT scheme, inside/outside IR35 etc but that's the general gist of it. There is a calculator that you can have a fiddle around with and try to make sense of it all. The VAT flat rate scheme is explained in the navigation links on the right side of the page.

**contractor0118** · 4 January 2013, 04:09

thanks alot !!!!

how much of expense is returned ?