IR35 Expenses
Navigating the intricate landscape of UK tax legislation is no easy feat, especially for contractors. Amidst the myriad of regulations, one term stands out prominently: IR35. But what are the allowable IR35 expenses? How do the off-payroll rules impact what you can claim?
In this comprehensive guide, we delve deep into the heart of IR35. Whether you’re an aspiring contractor or a seasoned veteran seeking clarity, this guide aims to demystify IR35, empowering you with the knowledge to make informed decisions and remain compliant.
Outside IR35 Expenses
Contracts that fall outside of the scope of IR35 allow contractors to work via limited companies, claiming all allowable expenses.
As a limited company owner, business expenses reduce profits before tax. This, in turn, reduces the amount of corporation tax owed to HMRC. More allowable expenses mean less taxable profit and a lower tax liability.
For an expense claim to be ‘allowable’, it must be incurred ‘wholly and exclusively’ for the purposes of business. The terms’ wholly’ and ‘exclusively’ are designed to prohibit expenditure that serves a dual purpose, a business purpose, and a non-business purpose.
Further details can be found in our guide to Limited Company Expenses.
Inside IR35 Expenses
Claiming expenses while inside IR35 is notoriously tricky. In April 2016, HMRC legislation came into effect, severely restricting what could be claimed by contractors deemed to be operating in a manner equivalent to that of a permanent employee.
While expenses can still be paid, they must be agreed with the end client and paid in addition to your standard contract rate. Unlike limited company contractors working outside IR35, you cannot offset expenses against your earnings.
Similar to permanent employees, all expense claims must be submitted, approved, and reimbursed on top of regular income.
The easiest way to think about IR35 expenses is to think of yourself as a permanent employee of the end client. If a permanent employee can seek reimbursement for something, it is likely you can as well. If they can’t, you can’t.
IR35 and Travel Expenses
Under the new provisions that came into effect in 2016, any travel and subsistence while working inside IR35 will be treated as if the engager employed the contractor directly. No relief is given for home-to-work travel costs and associated subsistence.
Inside IR35, contractors can only seek reimbursement for travel and subsistence expenses if they relate to the performance of their duties or travel to a ‘temporary’ workplace. These expenses must be approved by the client and paid in addition to the standard contract rate.
No relief is available for ordinary commuting, which is travel between home (or a place that is not a workplace) and a ‘permanent workplace’. HMRC outline several criteria for identifying what constitutes a permanent workplace.
IR35 and Accommodation Expenses
The 2016 changes to travel and subsistence allowances also impact accommodation expenses. Inside IR35 contractors can no longer claim costs such as hotels unless approved and reimbursed by the fee payer.
IR35 and Pension Contributions
Contractors working inside IR35 can continue to claim tax relief on pension contributions, regardless of whether they work in the public or private sector. We’ve written a detailed guide to umbrella company pensions that explains the options available to inside IR35 contractors.
IR35 and the 5% Rule
Prior to April 2021, contractors working inside IR35 were entitled to claim a 5% general expense allowance. This 5% was a flat rate, calculated on the gross fees receivable, and was designed to cover administration costs such as insurance, working from home, accountancy and training.
Since April 2021, new rules have significantly curtailed who can claim the 5% allowance. For all public sector and most private sector contracts, the 5% allowance no longer exists.
The only exception is if the contract sits within the private sector and the client is deemed a ‘small company’. A small company will fall under two or more of these requirements:
- Turnover of no more than £10.2 million;
- Balance sheet total of no more than £5.1 million;
- No more than 50 employees.