There are many things that contractors can claim through their limited company, that ordinary employees cannot claim. Here is my quick guide to what you can and can’t claim. If you have any queries the best thing to do is email us.
The General Rules
Generally if you are running a company then it is quite simple. If a cost is incurred wholly and solely for the derivation of income and it wouldn’t have been incurred anyway, then it will be deductible.
Claiming expenses in your own name, in your personal income tax return is far more strict and complicated. This is one of the major advantages of working through a limited company and it is why we always recommend that if you have expenses to deduct you should do it through your limited company, and not in your personal return.
Finally always keep your receipts for at least five years. We at LCCS do not require that you send in your receipts, if you tell us you have incurred an expense then we will believe you. And the chances of you ever needing to produce your receipts is not great. However if you do ever get a tax audit then you will be required to substantiate all of your deductions. Also it is a directors fiduciary duty to ensure that the company maintains good accounting records. In your case that won’t be too difficult as the number of transactions will be small, but it always helps if you have receipts for everything.
What you can’t claim
It makes sense to start with what you can’t claim. There are exceptions to every rule, but generally you can’t claim:
Clothing. You might only ever wear your suit to work, and may have never bought it if it wasn’t for working in an office. But you generally have to wear clothes whenever you are in public, so you would have had to have bought something. So clothing is not deductible.
Food. I know you only bought your lunch because you were at work. And if you were at home you would have had last nights leftovers for lunch. Unfortunately that doesn’t make it deductible. The only time you can deduct food is if you are away from home overnight on a business trip.
Travel to work. You cannot claim a deduction for your travel to or from work. Everyone has to get to work, and this is not part of the derivation of your income. However this is where one of the big benefits of working through a limited company kicks in.
You can’t claim the cost of getting to work, but you can claim the cost of travelling from your work to the client premises. And because you work for your limited company, who’s business address is your address you’re at work the moment you get out of bed. A quick check of your emails before you head to the client, just to make sure there is absolutely no doubt that you travelled from your home office to the client, and your trip to the client is fully tax deductible
Petrol. Or repairs and maintenance or any other motor vehicle running costs. Technically if the vehicle is owned by the company then it can claim these costs, however if the car is not used 100% for business then you have an employee benefit issue. Far simpler, and what we recommend, is that you keep the car in your personal name and you keep a log book of all business related miles you do. You can then claim a reimbursement of 40p for the first 10,000 miles a year, and 25p for every mile after that. Input this into our Submit Income and Expenses form and the company will reimburse you for your vehicle usage, and then claim a deduction its self for the cost.
Entertainment. It is possible under strict circumstances for companies to claim some portion of some entertainment expenses. However as a contractor it is unlikely to fly and you’re much better off not bothering to try.
What you can claim
This is the good bit, what you will get a valid tax deduction for.
As long as it goes through the company, basically every cost that is incurred in deriving taxable income. Ideally the company will pay the cost out of its own bank account. However this is not always easy, so you will need to pay some expenses personally. When you do this just leave the check box ticked next to the expense when you submit your income and expenses, and we will include the reimbursement in your payment amount.
Home office. Because you have a limited company, which runs out of your home you can claim a deduction for most of your home running costs, like heating, water, telephone, rent and insurance. You can’t claim the whole bill though, just the business use percentage. A common way to work this out is based on floor space. Work out roughly what percentage of your house you office takes up. Then work out how much of your use of your office is for business. So if your office is 20% of your house, and you use it 50% for business you would claim 10% of each household bill. Note you can’t claim the capital portion of mortgage repayments, but you can claim for the interest.
For more information about claiming home office expenses here is some text from the HMRC website
Travel between places of business. Like for example travel from you home office that you go to each morning to your clients office. If you buy an annual train ticket or monthly travel card and also use the trains for personal use then remember to apportion the cost between business and personal.
Other common expenses are those that are listed on our Submit Income and Expenses form. Just remember to keep your receipts and only claim for the business percentage.