What are allowable expenses for employed and self-employed people and what can be claimed against tax?

Mar 28, 2012 by

Guest Post by Steve Knowles

The rules for claiming expenses are complicated and vary according to whether you are self-employed or an employee.  Here is a brief guide to what constitutes an expense in both cases and whether it can be claimed against tax.

The basic difference between self-employed workers and employees (including contractors working through a limited company) is that employees can claim only for expenses incurred “wholly, exclusively and necessarily in the performance of the duties”, whereas expenses for a self-employed worker need only have been incurred “wholly and exclusively for the purposes of the trade” – they do not have to be “necessary” expenses.

HM Revenue & Customs (HMRC) accepts that in some cases, expenses such as a telephone for self-employed workers can be apportioned between business and private use.  In cases such as this, you will need to keep accurate records of all your telephone calls and whether they were for business or private purposes, to justify any expense claims that you make.

In general, expenses for employees/directors should be reimbursed by the employer, as not all expenses qualify for direct tax relief from HMRC.  In cases such as this, it is possible to eliminate the need for reporting certain expenses and benefits by requesting a dispensation notice from HMRC.  See www.hmrc.gov.uk/paye/exb/schemes/dispensation.htm for further information about what can be included in a dispensation and how to apply for one.

Expense claims of any nature must be justifiable and supported with evidence such as a receipt, as excessive claims could arouse suspicion and lead to an investigation.  Except for entertaining, all employee expenses that are paid or reimbursed will qualify for tax relief in the company’s accounts.

Here is a brief summary of the kinds of expenses that you might incur.  It is not an exhaustive list, so if you have any queries or would like advice regarding a situation that is not listed here, your accountant would be happy to advise you on the best way forward.

Employed Self-employed 
Travel Claim only for travel actually in the performance of the duties, or to a “temporary workplace”, i.e. to a place where you are working for a period of less than 24 months.  Travelling between your home and usual workplace does not count. Claim for any business related travel, which could include customers’ premises, suppliers, bank, accountant etc, but not between your home and your office if this is separate from your home.
Subsistence Claim when away from the office for more than 5 hours – HMRC guidelines allow £5, or £10 if away for over 10 hours, plus a breakfast and evening meal rate for exceptional early starts or late finishes Claims allowed only where overnight stays are involved, but these must be actual costs only and accompanied with a valid receipt.
Accommodation Only allowable if working at a “temporary workplace”.  The employee can claim for “personal incidental expenditure” at a rate of £5 per night, or £10 if overseas. Claim actual costs for any overnight stays, accompanied with a valid receipt.
Working abroad Actual costs for “temporary workplace”, plus additional amounts at agreed rates depending on the country All travel, subsistence and accommodation costs while abroad are allowable.
Telephone Business calls only – no part of rental costs can be claimedOR

Have a mobile telephone in the company’s name (it is now possible to have a smartphone without it representing a benefit in kind)

Reasonable apportionment of business/private cost, including line and/or equipment rental
Entertaining Can be reimbursed by the employer, as long as it is disallowed for the company’s tax Not allowable
Use of home Maximum claim £3 per week (£4 from April 2012) – any more must be proved in terms of additional costs actually incurredOR

The company can pay rent at the commercial rate and the employee must declare the income on a self-assessment return and offset a proportion of the costs.  However, this is only available if the company’s office is the home address (a rental agreement should be provided, but this could have implications for capital gains tax)

Reasonable apportionment (on area and time basis) of total costs, including rent/ mortgage interest, council tax, insurance, water, heat and light, maintenance etc
Computer, equipment etc It can be difficult to claim tax relief personally against the cost of the equipment, but it can be provided by your company for business use Capital allowances are available on all equipment purchased for business, but if used for personal activities, capital allowances would be restricted accordingly.

Steve Knowles set up his own practice working out of a back bedroom 27 years ago. The business grew and now employs 17 people. The foundation of the business is the relationship they have with their clients, and their commitment to their success. He has other business interests including financial services, property development and a software company based in America. Steve served as a Governor at the Sheffield College for five years before being asked to become Chairman of the Board of Governors. He is a past Chairman of the Sheffield Business Club and is currently President of the Sheffield & District Society of Chartered Accountants. He has been married to Christine for over 30 years, and they have two daughters. In his spare time he is an armchair sportsman. http://www.knowleswarwick.com/ Steve’s Blog

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