Business Expenses — Tax Deductible or Not?
As an independent contractor, you should aim to maximise your earnings after tax. That’s achieved by a combination of a high level of income, being tax-efficient and recharging all allowable expenses. The value of the latter shouldn’t be underestimated because, even though individual expense amounts may be small, they add up over the course of a year into a significant sum.
Depending on the contracts you have with individual clients, you may be able to recharge certain expenses along with your fees. Any others may be reclaimable against income providing they are allowable.
What is Allowable
If any work you do falls within IR35 legislation, you will only be able to claim travel and accommodation, pension contributions and professional subscriptions plus an additional 5% of income to cover various administration expenses (such as accountancy, insurance and stationery).
If outside IR35, however, you have much more scope. In effect, you can reclaim all expenses that are incurred wholly, exclusively and necessarily in the course of business and where you have evidence to support the claim. These can include:
- travel costs to and from your contracted place of work, either using public transport or set mileage rates (currently 45 pence for the first 10,000 annual miles and then 25 pence for cars, less for motorcycles and bicycles); these costs can include parking fees but not fines and you can even claim 5 pence a mile when travelling as a passenger in a car
- subsistence including meals when working away from home
- business calls and mobile phone costs
- stationery and consumables
- professional subscriptions and training costs related to the business
- accountancy fees and other administration costs
- the cost of a home office or other place of work at allowed rates
- payroll costs, including employer’s NI
- equipment and software
- bank charges and interest.
Proper Expenses Administration
In order to properly claim and be able to subsequently justify your business expenses if necessary, you must keep adequate records. To do this:
- log all expenditure as it occurs so you don’t forget
- keep a log of business mileage, detailing each trip with the date, purpose, destination and mileage
- retain receipts for all business expenses, attaching them to the relevant expense log.
HMRC will look for excessive expense claims and can go back six years, so retain all records for at least this period. If any expenses are part business and part personal use (such as a home telephone bill or a trip that is a mixture of business and pleasure), you must apportion the amount as accurately as possible. You’ll also need to complete an annual P11D form and this will be easier if your records are adequate.
If you are unsure if a particular item can be claimed as an expense, consult your accountant for advice. Phoenix Cloud Accounting provides full help and support as well as all the tools necessary to record and claim valid expenses.