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27/04/2007

Expenses – what can you claim?

Expenses are an integral part of working as a freelancer or contractor – but to maximise your net pay, you need to know what’s claimable, and what’s not. Here we give an overview of expenses allowed.

Expenses and IR35

Whether you choose to work through a PAYE umbrella company (such as March Mutual PAYme), a traditional limited company, or a Personal Services Company (such as March Mutual GoLTD), the same tax rules apply.

The big deciding factor in the amount of tax-deductible expenses you can claim is your IR35 status, as shown below. For information on whether you fall inside or outside of IR35, see here, or call us today.

Allowable expenses for those caught by IR35

For freelancers falling within IR35, the following can be legitimately claimed:

  • Your gross salary, calculated in accordance with the IR35 regulations
  • Travel expenses
  • Administration expenses (limited to 5% of the gross fee received)
  • Direct business expenses

Allowable expenses for those outside of IR35

For freelancers not caught by IR35, the following can be legitimately claimed:

  • Your gross salary – often set at your personal allowance (£5,225 for 2007-2008 basic rate) to minimise National Insurance Contributions and maximise tax-efficient dividends
  • Your spouse’s salary (which must be realistic for the duties performed)
  • Travel and motoring expenses (including mileage claims if the car is yours)
  • Business calls
  • Computer costs and equipment
  • Work-related books, magazines, subscriptions and courses
  • Accommodation and subsistence (more details below)
  • Bank charges and interest on your company bank account
  • Company pension (if involved in a HMRC approved scheme)
  • Business insurances
  • VAT on expenses (if your company is VAT registered)

As you can see, the allowed expenses are far greater for those not caught by IR35.

Expenses that are chargeable to your agency or client will be refunded to you in full; all others will be processed as a tax benefit, helping to maximise your net pay.

Umbrella companies and expenses

You may have heard about PAYE umbrella companies having special Dispensation Agreements for expenses, allowing them to process expenses promptly without having to record them on a P11D or P9D form (which they would have to do under standard accounting practice).

While all umbrella companies have a dispensation of this sort, it does NOT mean you can claim for all types of unreceipted expenses in the hope of reducing your tax liability. The Inland Revenue can ask to see proof of expenses legitimacy at any time, so if you can’t back up your claim with receipts or proof of it being a proper work expense, don’t claim for it.

The only expense you can claim without a receipt is a daily subsistence allowance of £5 in the UK, and £10 overseas, claimable when working away from home overnight.

What a Dispensation Agreement does offer is a simplified process for freelancers, as it does not require the details of expenses covered by the dispensation to be logged in an end of year tax return.

Umbrella companies claiming to have special dispensation that doesn’t require any receipts, or can save you vast sums of money, should be given a very wide berth. The liability of any underpaid tax always resides with the freelancer, so to stay safe, choose a reputable umbrella such as March Mutual PAYEme – and always keep your receipts.