As a contractor, you may find claiming expenses complicated and time-consuming, but it doesn’t have to be. As long as you understand the rules and guidelines for claiming tax relief on expenses, you can maximise the tax benefits for your company.
This guide will cover:
- What business expenses are
- Why contractors should claim expenses
- What contractors can expense
- How Countingup can help with your expenses
What are business expenses?
Before we answer the question ‘what can you expense as a contractor?’, we’ll quickly explain what a business expense is to make sure there’s no confusion.
A business expense refers to anything you purchase that is necessary for the everyday running of your business. This could include travel expenses, phone and internet bills, and in some cases, even a proportion of your utility bills if you work from home.
You can learn everything you need to know about business expenses in our ultimate business expenses guide.
Why should you claim expenses as a contractor?
Most expenses you have as a contractor will be tax-deductible, meaning you can deduct them from your business’ profits. While this may seem counterproductive, deducting business expenses can improve the financial health of your company. You’ll come away with a lower tax bill (meaning you owe less in tax) and more spendable cash for your business. In turn, you increase your company’s value and maximise the profits available for investment or drawing dividends (profits you pay your shareholders).
Additionally, claiming your business expenses is an important part of demonstrating your company’s independence if you work outside IR35. Learn more about how IR35 affects contractors in this guide. Expenses like marketing costs and professional fees are strong indicators that you operate as a separate entity from your clients, which supports your IR35 status.
What can you expense as a contractor?
While you can claim most of your expenses against your tax bill, it’s important to note that you can only claim for costs that relate to your business. In other words, you can’t claim expenses that also relate to personal use.
To make it clearer, we’ve listed the main expenses contractors can claim:
Goods are physical items that you need to run your business successfully. Examples include stationery, furniture, IT equipment, your company van, printing supplies and more.
Basically, you can claim tax relief for any goods you have bought to carry out your daily business activities.
You can also claim tax relief on any services you need to run your business more efficiently. Examples of deductible services include hiring an accountant, solicitor, tax consultant or marketing professional. You can also claim relief for some insurance services.
HMRC will also consider the fact that you have to pay for these services when assessing your status under IR35, meaning they could prove your business as an independent entity.
Do you subscribe to a professional organisation or business publication to help you improve your trade? In that case, you may be able to claim the cost against your tax bill. However, make sure you check if HMRC recognises the professional body you subscribe to. You can do this by visiting HMRC’s approved list.
If you have to spend a significant amount of time working from home, you could also claim for expenses like your landline, broadband fees, heating and lighting. Note that you can only claim for the portion of the utilities that you use for business purposes. You might be able to use HMRC’s simplified expenses system to calculate how much you can claim.
You can also claim for the costs you incur from travelling to client sites. If you use public transport, simply keep the receipts to claim your fare.
If you’re a contracted builder or painter, you’ll likely have a company vehicle you use to travel between sites. In this case, you can claim relief based on the number of miles you travel.
HMRC has a fixed rate for mileage that you can claim. For a car, this is 45p per mile for the first 10,000 miles per year and 25p per mile after.
Business start-up costs
Starting a new business can be expensive, but you can claim a lot of your start-up costs as expenses. Document any expenses you pay for out of your own pocket when starting out and claim it back once your business starts trading. Learn more about business expenses in this ultimate guide.
How do you claim business expenses?
Self-employed contractors claim tax relief on their Self Assessment tax returns, which is when you declare to HMRC how much your business earned and spent during a tax year.
Record all your business expenses as proof of your costs and add up your allowable expenses on your tax return. Once you’ve added the total amount to your Self Assessment, send it to HMRC.
You must keep a receipt or proof of purchase for all expenses that you claim for. While you don’t need to send in proof of expenses when you submit your tax return, HMRC might ask to see them, so make sure you keep your evidence handy.
Organise your expenses with Countingup
Countingup is the business current account and accounting software in one app. It automates time consuming financial admin so that you can focus on running your business. With automatic expense categorisation, notifications to capture receipts on the go, instant invoicing and cash flow insights, you can confidently keep on top of your business finances everyday. Find out more here.