Mistakes to avoid when reporting contractor expenses

For contractors working via a limited company or personal service company, who are on an outside IR35 contract, it is paramount to maximise expenses in light of the recent increase in corporation tax rates.

Essentially, since April 6th 2023, if your annual company profits exceed £50,000, then your corporation tax rates rises from 19% to 25% depending on your profit levels.

While claiming tax relief on expenses incurred helps to reduce your overall tax bill to HMRC, it is important to ensure that claims are made in line with tax legislation, writes Matt Fryer, managing director of Brookson Group, a People 2.0 company.

So, what are the mistakes to avoid when reporting contractor expenses?

Let’s take a look at areas where contractors traditionally make mistakes -- areas which can be overlooked when looking at ways to maximise your expenses claims to reduce your corporation tax bill.   

1. Not knowing (or abiding by) your IR35 status

If you are on an outside IR35 contract, then your end-client would have provided a Status Determination Statement to indicate your status.

It is important to note that those contractors working through their PSC who are on an inside IR35 contract will not be able to claim everyday expenses such as business travel and subsistence costs. Therefore, getting your status wrong can have a significant impact on your entitlement to expenses.

2. Overlooking key HMRC legislation and expenses criteria

According to HMRC guidelines, tax deductible expenses must be “wholly, exclusively and necessary” for your business.

This means that the expense must directly relate to your company’s business activities. There should not be any personal element to the payment, although there are couple of exceptions where incidental personal use is accepted. For instance, a mobile phone or computer use.

An accountant  should be able to provide guidance here, and in the first instance, many now provide detailed information available on their website.

3. Forgetting these 16 tried and tested allowable business expenses

The following is a list of expenses that can be claimed – i.e. you’re not mistaken if you’re leaning towards claiming these!

But it’s not an exhaustive list and there may be other expenses you incur which meet the HMRC criteria:

  1. Company accountancy fees
  2. Accommodation costs while on business travel
  3. Advertising and marketing
  4. Business insurance
  5. Business mileage
  6. Charitable donations to a UK registered charity
  7. Christmas party or other staff event (up to £150 per head)
  8. Computer equipment and printers
  9. Mobile phone
  10. Professional subscriptions
  11. Protective clothing
  12. Relevant life policies
  13. Company pension contributions
  14. Training expenses (to enhance your existing work skills)
  15. Trivial benefits (A gift to an employee as long as less than £50, isn’t cash/cash voucher and is not a reward for work/performance).
  16. Use of home as an office (if you regularly spend time working from home) or claim the working from home allowance.

4. Neglecting record-keeping

Maintaining accurate records is essential for ensuring you process your expense claims forms correctly and efficiently.

Keep a track of your income, expenses, receipts, and invoices.

You should consider using accounting software or hiring an accountant to streamline this process.

Then ensure your expenses are processed regularly. The aim here is that all relevant expenses get included in the accounting period they relate to.

A well-organised record-keeping system will help you stay on top of your finances, make tax deductions easier, and provide evidence in case of an HMRC audit.

Retaining receipts is of particular importance, as they help to demonstrate you have incurred the cost. Plus if your business is VAT-registered, receipts are required to substantiate a reclaim of the VAT.

5. Wrongly mixing personal and business expenses

As a PSC/limited company director, it’s important to avoid intertwining personal and business expenses.

Mixing the two can lead to confusion and create complications when it comes to claiming tax deductions.

You should ensure all business expenses are paid from a separate company bank account and company credit card account.

This maintains a clear differentiation between company and personal records and makes it easier to track your business expenses and demonstrate the legitimacy of your deductions.  Any out-of-pocket expenses paid personally should all be wholly supported by an expense claim form.

6. Letting mileage rack up untracked

If you use your personal vehicle for business purposes, it’s crucial to keep a detailed mileage log.

Business mileage expenses can be claimed as a tax deduction, but without proper records, it becomes difficult to accurately calculate and support your mileage claims.

We would recommend maintaining a mileage “log” to record your business-related journeys. Alternatively, there are mileage apps available too. You should include the date, purpose, starting and ending locations, and the number of miles travelled.

This information will be essential when calculating your mileage deductions and defending them during any HMRC review. If there are associated subsistence costs then retaining receipts for these costs incurred during your business journey also evidences the validity of your claims.

7. Not remembering capital allowances

PSC contractors may be eligible to claim capital allowances for certain assets used in their business, such as laptops, equipment, machinery, cars and vans.

It is also worth noting that these are “capital” in nature, so although not expensed against company turnover, they attract capital allowances of up to 100% of their cost as a tax deduction against company profits.

Please note, where there is personal use of assets such as cars and vans, there is an associated benefit-in-kind which gives rise to a personal tax liability on the director/employee who has personal enjoyment of the asset.

8. Flouting key deadlines

Missing tax deadlines can result in HMRC penalties and interest charges and is therefore an unbudgeted company expense, which is not deductible against company profits.  

It’s crucial to stay organised and aware of key dates throughout the tax year. Your accountant will normally advise when your accounts are due to be filed at Companies House.

For instance, this is normally nine months following the end of the company’s accounting period. If you are late, then there is an automatic £150 penalty. Similar late filing penalties are also in place for late HMRC submissions. We recommend setting up reminders to help you stay on top of these deadlines and avoid unnecessary penalties.

9. Falling asleep at the wheel of regulatory change

As said at the top, corporation tax for small companies changed quite significantly last year and we’re still seeing the ramifications of that change. Not keeping abreast of HMRC thresholds, rates, allowances and even its U-turns, can lead to nasty surprises, or worse – a tax demand. So it can pay dividends to check trusted and unbiased sources of information on tax, accounting, legal and HMRC matters on a daily basis, to avoid erring with expenses.

10. No longer putting your contractor accountant to work

Busy contractors might need an accountant initially with company formation but then forget to get their money’s worth by not checking back in with their tax or accounting adviser every few weeks. 

Mistakes to avoid when reporting contractor expenses aren’t unfortunately confined to just the ten listed here -- and while limited company directors cannot just leave everything entirely to an accountant, an adviser you’ve paid for is key to optimising your take-home while keeping compliant with HMRC. We would always advocate speaking to your accountancy or financial adviser regularly, to ensure you’re maximising your expenses and minimising the potential for missteps.

Monday 13th May 2024
Profile picture for user Matt Fryer

Written by Matt Fryer

Matt is a Chartered Tax Advisor with 18 years' experience of advising on tax planning and compliance. Matt has been with Brookson since 2009, having previously worked for Big 4 accountants, KPMG and PwC. Matt’s primary role is to ensure that the services provided by the Brookson Group comply with relevant legislation and regulatory requirements. Matt is also a Board member of the FCSA, the UK's leading membership body dedicated to promoting supply chain compliance for the temporary labour market.

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