Contractor expenses guide: what can you claim?

Whether you’re a self-employed contractor, or contracting through your own limited company, putting your costs through your business and offsetting them against your income will reduce your taxable profit.

Introducing the wholly and exclusively test…

So, when it comes to contractor expenses, what costs can you claim, exactly?

No matter the type of business structure you run, HMRC stipulates that for an expense to be allowable it must be wholly and exclusively for the purpose of the business, writes Christian Hickmott, managing director of Integro Accounting.

However, the rules are slightly different for those working as a sole trader and for those working through a limited company (‘LTD’). Here, exclusively for Free-Work, I’m going to outline the HMRC rules for each so you can be sure you’re maximising your expenses and reducing your profit as much as possible, albeit compliantly!

Self-employed expenses as a sole trader

When running your business, you are almost certainly going to incur costs. Whether that’s day-to-day running costs or larger, one off, purchases, including those in your accounts and tax returns, these costs will reduce your profit, therefore reducing the amount of income tax and national insurance you need to pay.

Where a cost is wholly and exclusively for the purpose of the business this will be allowable in full for tax purposes. Whereas a cost which isn’t wholly and exclusive and has some sort of dual purpose, it will need to be assessed and a portion of this disallowed in the tax computation.

Adjustments case study

For example, you have a van which is used primarily for work, say 80%. If all the costs relating to the van have been included in your accounts, an adjustment needs to be made when calculating the taxable profit to add 20% of those costs back in.

Certain costs, although they are wholly and exclusive, are not allowable for a tax deduction at all. The most common example being customer/supplier entertaining. There are also different rules for charitable donations, as these need to be accounted for separately on your tax return.

Check out HMRC’s guide to expenses for the self-employed for further details, and if in doubt, your accountant can tell you the ‘dos and don’ts’ of individually allowable expenses.

Record-keeping when self-employed

We advise that you keep records of all business expenditure as and when the costs are incurred, even for those businesses that are not currently mandated to do so under Making Tax Digital (MTD).

Not only does this retention method keep everything up to date (giving you better visibility of the business and its performance), but it also means everything is ready to go, should HMRC want to raise any enquiries. Using bookkeeping software helps to keep this nice and easy – with many platforms you can simply take a photo of your receipt, upload it, categorise it as an expense and it’ll do the rest!

Is HMRC’s ‘simplified expenses’ suitable for you?

As a self-employed individual you will also be able to use so-called ‘simplified expenses.’ This HMRC offering allows you to use a flat rate for certain expenses, as opposed to calculating each one. It can become complicated and time-consuming when working out the percentage of private versus business use for certain costs, so this method is handy for those looking to include vehicle costs, use of home as office costs or where they live in their business premises.

Is HMRC’s simplified expenses method appropriate for you? Best thing is to speak with an accountant to find out whether you qualify and then, if so, identify which costs should be replaced by the simplified expenses.

Limited company contractor expenses

As mentioned at the top, limited company costs should be incurred only when ‘wholly and exclusively’ for the purpose of the business. So, the costs you can include when working through a LTD are very similar to those as self-employed.

However, the main difference comes in the way a business owner (in this case a director/shareholder) can be renumerated. While some tax and national insurance would be due on costs classified as a benefit-in-kind, this is still an allowable expense for the company and so your overall tax liabilities can be reduced.

Expenses you can claim as a LTD company contractor

When working through your own limited company (also known as a Personal Service Company), you have greater flexibility over how you withdraw the funds from the business.

As the benefit-in-kind rate is so low at the moment, we are seeing a lot of clients buying an electric car through their company, which is then used for business and personal use!

As long as the car is brand new you will be able to offset the full amount of the cost of purchase against your profits in the same tax year. As the car is then a company asset, all repair and maintenance costs are allowable company expenses. Your benefit-in-kind will be based on the list price of the car and the rate set by HMRC for that tax year (2% for 2023/24).

Pensions as a PSC 

Working through your own LTD /PSC also gives you the option to contribute into a pension scheme directly from the company. As this is treated as a salary sacrifice, you have greater flexibility in the amount you can contribute in a tax year.

Rather than being capped by your earned income (often a relatively low amount based on your salary), you are able utilise the full allowance each year without incurring any additional personal tax charges. These contributions are also fully allowable so will reduce your company’s taxable profits.

Recording expenses as a limited company contractor

As a contractor working through your own limited company, it is very likely that you will be VAT-registered and so mandated to keep your records in a certain way to then be submitted to HMRC.

If it helps to know, FreeAgent is our ‘go-to’ – it’s bookkeeping software that was built for contractors by contractors.

As well as being confirmed by HMRC as compliant with MTD, the software is easy to use for tracking expenses, estimating corporation tax liabilities and, most importantly, calculating profits available to you as the business owner.

Which items do sole trader and limited company IT freelancers commonly claim as expenses?

Finally, although the following is not a comprehensive list, from our experience it includes the more popular expenses incurred while running a business, by technologists trading as either a sole trader or through their own limited company -- not including accountancy and insurance costs!

 Limited company: typical expenses which we know are ok with HMRC!

•             IT and technology: hardware/software costs

•             Business travelling expenses: trains, taxis, mileage.

•             Staff entertainment: £150 per employee-per tax year (not accounting year)

•             Mobile telephone and monthly cost (only if billed direct to the company)

•             Salaries paid by the company to the director / employee

 Sole trader: typical expenses which we know are ok with HMRC!

 •             Business travelling expenses: trains, taxis, mileage.

•             Costs of business-related phone calls

•             Software costs

•             Equipment required for trading

•             Use of home-office allowance (which is decided upon based on the hours spent at home).