In the course of each contract, the chances are that you will pick up some expenses in order to allow you to perform your job properly. These may come in the form of travel expenses (whether that be the cost of getting a train or bus or more frequently the cost of petrol) or even the cost of accommodation when working far away from home. You may be paid extra to cover these costs or you may pay for them out of your own pocket as part of the contract or simply because it is cheaper than travelling to and from the location each day.
Claiming Back Tax
However, it is possible to claim the tax that you pay on these expenses back from HMRC. At the moment the UK has a Value Added Tax rate of 20%, up 2.5% due to the recent economic downturn. Contractors can reclaim this but they are required to pay for the items themselves to start with and then claim it back through their VAT returns. An example of this would be that you paid £1000 worth of expenses in a month and made £5000 overall, which would be subject to income tax. However, due to these £1000 expenses, you would receive a 20% refund on this £1000 – a saving of £200.
The expenses that you can claim include money spent on such things as magazines and subscriptions to industry and related publications, bank and other finance charges relating to your business, pension contributions, relevant insurance policies, monthly telephone, internet etc bills and any other fees that are directly related to your job. You may claim the cost of meals and hospitality when working away from home – but this isn’t unlimited. You can only claim a reasonable amount and it only extends to meals and accommodation required as a result of this contract.
Claiming the Right Expenses
Expenses are a great way of limiting the tax you are required to pay, which is substantial enough anyway. However, it is essential that you only claim back expenses on items that are directly related to your business and that you retain the proof of these expenses.
HMRC will sometimes begin an investigation into a contractors expense claims so you may be caught out if you have not told the truth, but the majority of contractors who are honest in their claims will have nothing to worry about. Those that are found to have lied to HMRC either through a random inspection or a targeted one will be treated harshly and be added to the HMRC watch list.