Contractors: Mistakes with your expenses could get expensive!
Accounting should, in theory at least, be one of the most exact features within any business. The same numeric principles of addition and multiplication, profit, loss and cash flow have remained unchanged for millennia. Maybe the technology has changed over the centuries and the rules around how much to add and take away differ, but the essence of accountancy remains a clinical and precise art.
If there is one area of constant confusion, discussion, misinterpretation, mixed opinions and even the occasional urban myth it is expenses. To be even more precise (I am an accountant) the rules around what you can and cannot claim on expenses. The problem is, that regardless of what any individual contractor or freelancer thinks, has been told by a friend, or read somewhere… the rules are still the rules.
And if you are caught claiming the wrong things then, “Bill told me it was OK” is not a strong enough defence to save you from a fine, in fact, it is no defence at all! Even worse still – you could be missing out if you are not claiming everything you are entitled to.
What are the big mistakes?
Expenses is an area where some of the rules could be confused; and misinterpreted due to individual circumstances. For example, you are allowed to claim for travel expenses incurred during the course of ‘doing’ your job: but you cannot claim for the cost of travelling to and from your permanent place of work. For a contractor that does mean the main office or site they are working at while under that particular contract. And you can claim for lunch if you are ‘entertaining’ a customer or travelling: but you cannot claim for your regular daily lunch as a company expense. HMRC will simply ask if you also eat lunch when you are not at work.
The expenses rule of thumb.
For an expense to be an ‘allowable business expense’ and a non-taxable expense for a contractor, it must be incurred ‘wholly and exclusively’ while carrying out your duties of employment. (Contractors are treated exactly the same as employees in respect of most expenses). The general rule of thumb is to stop and consider whether the expense could have been incurred for anything other than for business. If the answer is “yes”, HMRC would argue there to be ’duality of purpose’ (it has been incurred for more than one reason), and therefore the expense is not wholly allowable. In some instances, this means items may be partially allowable.
It is also worth noting that in most cases the invoice or receipt must be made out to your company or it may be difficult to represent it as a company expense.
I know some people might try and bend the rules a little and ‘get creative’, but is it really worth the risk of a hefty fine for a few sandwiches and train journeys?
I am also aware that the rules seem a little unfair and heavily stacked in HMRC’s favour. This is also true (what do you expect), but when you understand the rules fully, you can be sure to claim for everything you are entitled to – no matter how small a sum. It is your money after all – wouldn’t you rather have it in your pocket?
Other common misconceptions about contractor’s expenses:
- Use of home: only claimable at HMRC’s flat rate, unless evidence of the ‘separate metered cost’ of running your business from home can be provided (unless you want to avoid some of the new dividend tax :), you can ask me how this would work if you want)
- Internet: only if you can prove it is solely for work
- Life Insurance: Good News! ‘relevant’ policies are a claimable expense
- Training costs: once again, only if you can show it is relevant to the work you do.
There are many trips and potential hazards when claiming expenses. If you would like a second opinion on your expenses, or simply have a question get in touch today!