If you're contracting through your own Limited company, claiming expenses will likely be an important part of your daily working life and getting it wrong could cost you money. With that in mind, here are some common pitfalls to avoid.
“Wholly, exclusively and necessarily…”
If you’re researching expenses online, you’ll see this phrase a lot. It’s a general rule for deciding if expenses are allowable or not, and while it’s not a “pitfall” in itself, understanding it does make you less likely to fall for some of the others. Any expenses you claim must be incurred “wholly, exclusively and necessarily in the course of your business”. Because it’s so familiar to many, it’s often thrown out with little explanation, so let’s break down what it means.
Wholly – the entire cost of the expense must be incurred for business reasons.
Exclusively – the expense must be incurred only for business reasons. This means there must be no “duality of purpose” or personal benefit to you.
Necessarily – There must be a genuine business reason for incurring the expense. Usually, this means an expectation that your company will make more money as a result of incurring the expense.
Not keeping accurate or detailed records
Contractors are busy people, and you’ll be understandably focussed on getting the job done for your clients. It’s easy to think you’ll remember the details later, and just as easy to misplace an important receipt or forget a journey, particularly if you travel to several places in a single day.
The trick is to get into the habit of recording everything in one place as you go along. If you’re lucky enough to be with Orange Genie Accountancy, you’ll have access to FreeAgent’s award-winning web-based software, which will allow you to record everything on the go. Otherwise, you might find that keeping a spreadsheet on your smartphone works best, or you could go low-tech and carry a notebook in your pocket. Whichever solution you choose, you’ll find spending a few seconds each time you incur an expense is far preferable to tearing your hair out for hours once a month as you try to remember what you did and where you stashed your receipts.
Not keeping the evidence
This is related to the last point, and you’ll naturally find it easier to hold onto your receipts if you’re used to keeping track of your expenses as you go along. Many expenses can’t be claimed without supporting evidence, and as a general rule it’s worth keeping the receipts for everything.
Again, if you have access to FreeAgent you’ll be able to photograph and upload your receipts on the go, which means there’s no need to carry around a pocketful of paper, and you don’t risk losing important evidence each time you put your bag down somewhere.
Forgetting your personal liability
It’s not impossible for your company to pay for something on your behalf, you just need to recognise the personal element and pay the appropriate tax. For instance, your company may pay for your gym membership which is a great perk. If they do, you save on the membership cost but will have to be declare the value on your P11d and pay the associated income tax. You may also be provided with a business asset that you can use personally, for instance company laptop. In this scenario, you must declare the asset’s annual value on your P11d and pay income tax. The asset’s annual value is 20% of its market value when first provided. You will then pay tax at your highest rate of tax on this benefit. If you are not sure whether you are about to incur a tax liability, ask your accountant.
Your expenses represent a cost to your business, and the fact that claiming them reduces your tax doesn’t make them free. For a business expense to be reasonable, you’d expect your business to make more money than it spent. For example, spending £1000 on travel and accommodation so you can complete a contract worth £800 wouldn’t make any sense.
Overspending can also create a benefit in kind in some cases. For example, if the accommodation you’re staying in is of better quality than your home, it could be argued that you’re getting a personal benefit from that expense.
Not claiming because you’re unsure of the rules
The rules surrounding expenses claims can be complex, and as a contractor you have enough to worry about without having to become an expert in tax law. When contractors look at the rules and the risks and decide that it’s not worth claiming some or all of their expenses, it’s understandable, but it’s a terrible shame. We hate to think of you paying more tax than you need to.
This is one of many reasons why it’s important to engage a specialist contractor accountant, who will understand the expenses rules as they apply to you, and will have worked with many businesses like yours. If you work with Orange Genie Accountancy, your dedicated accountant will have the time to get to know you and your business, so you know for certain that you’re not missing anything.