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Expenses for a PSC

 

Summary

Expenses are important as they reduce your tax bill – its in your interest to maximise these within the law.

The basic rule is that expenses can be claimed if they are “wholly and exclusively” for business – which is why, for example domestic costs cannot be expensed.

This guide is part of a series. This is the index:

 

Contents

 


Basics of Expenses

In accounting terms there is no limit to what can be “put through” the company, but many items will not be allowable for tax or vat purposes, meaning expensing them will have no benefit, and possibly extra costs in relating to NI on Benefits in Kind.  For this reason its generally best to stick to expensing allowable items rather than confusing things

This is a list of common allowable items:

Tax Revenue Tax Capital VAT input Tax Notes
Accountancy
Advertising & promotion
Bank charges X
Company formation X
Computer software
Computer consumables
Computer purchase & peripherals Smaller items are often treated as revenue
Entertaining – staff
Entertaining – UK customers X X
Entertaining – overseas customers X
Equipment insurance X
Fee Protection Service
Home office X Normally claimed as round sum
Hotels/b&b
Internet service provider
Legal expenses
Mileage claims VAT on fuel element only
Mobile telephone
Newspapers & journals X
Office equipment & furniture
Opticians costs and eye tests X Where the work necessitates
Parking Check this – VAT won’t always apply
Pension payments X
Postage X
Protective clothing Where the work necessitates
Professional/Public Indemnity
Insurance X
Reference books X Vat recoverable in part if disks/CDs included
Rented property (job related) X
Relocation costs (job related)
Sub contractor costs
Travel (rail/ferry/air) X
Subsistence Distinguished from entertaining
Stationery
Telephone costs
Tools
Training courses & materials

 

The following are not normally allowable for tax or vat:

  • Entertaining – existing/potential clients/associates
  • Gym/sports club membership
  • Health insurance
  • Life insurance and Income protection insurance (with some exceptions)
  • Medical or dental expenses
  • Office clothes
  • Child Care – existing Childcare Voucher schemes may continue, but Child Care is now via Childcare accounts

In most cases dis-allowable expenses can be put through the company, but whilst they save Corporation Tax at 19% they create a personal Income Tax charge at 20% / 40% and a employers NI charge at 13.8%, – so there is generally no benefit in expensing them.

The above is a guide only – there are numerous subtle nuances to expense allowance, and all claims will need to be reviewed by your accountant at the year end.

Expenses are only allowable where they are business related – for example travel and subsistence expenses related to your family or domestic life would not normally be allowable, although in some cases where temporary work related accommodation is involved there is an overlap.

 


Revenue v Capital

For tax purposes expenses are classified as revenue or capital. Revenue expenses are day to day expenses where the benefit is short term. Capital expenses are longer term items of expenditure incurred in acquiring an asset, for example computer or furniture purchase.

Revenue expenses are written off against tax when incurred.

Capital expenses are added to your balance sheet, and depreciated over time (a form of spreading the cost). In terms of tax

  • Capital expenditure on business equipment of up to £1,000,000 (two year temporary increase from January 2019 to December 2020, then £200,000 from January 2021) can normally be written off in full in the year it us incurred via Annual Investment Allowance (AIA); expenditure in excess of that is written off over a period.
  • Special rules apply to fixtures and plant in buildings, and to buildings themselves
  • Special, and more restrictive, rules apply to cars.

Not all capital expense attract relief. Broadly speaking:

 


Benefits in Kind

Benefits in Kind are items which are allowed for Corporation Tax, but are treated as giving personal benefit to certain individuals, normally directors, and hence:

  • The beneficiary – normally a director – has a tax charge on their value
  • The company normally pays NI on their value
  • They have to be reported to HMRC annually via a P11D

Typical BIK areas are:

  • Gym/sports club membership
  • Health insurance
  • Life insurance and Income protection insurance (with some exceptions)
  • Medical or dental expenses
  • Company cars

Our advice is not to expense them – the combined tax and NI on the BIK is normally more than the similar Corporation Tax and Dividend Tax arising from extracting the funds as dividend and settling them personally.

Cars represent a special case for BIK – the annual BIK is derived from a combination of their original list price when new, and their CO2 emissions.  Generally its better to own cars personally.

The BIK on Vans and Motor Cycles is not as onerous, and these can be more realistically expensed so long as there is genuine business use – a small BIK does still arise.

 


Eligibility of Travel and Subsistence Expenses

Difficulties arise with PSC users travel and subsistence due to their being home based, and the question of whether their clients location is genuinely a temporary workplace (as opposed a permanent workplace for a period of time):

The basic rules applicable to PSC users are:

  • Travel, accommodation and subsistence on miscellaneous business journeys, eg to conferences, exhibitions, interviews, accountants, bank, agency, etc, are all allowable
  • Journeys between work places are allowable
  • Journeys to and from home to a temporary work place are allowable if
    • the contract is outside of IR35; and
      • the contract is expected to be for less than two years; or
      • the contract is for more than two years but you spend less than 40% of your time at the site
  • Whilst a home office may be a place of business, it will not be a workplace unless substantive duties are performed there regularly (distinquhed from administrative ones)

The two year rule applies on intent and expectation, eg:

  • If the contract is intended to be 36 months then nothing is claimable (unless the 40% exemption applies)
  • If the 36 month contract is reduced to 20 months at month 14, then although nothing is claimable for months 1-14, a claim can be made for months 15-20.
  • If a 20 month contract is extended to 40 months at month 18, then a claim can be made for months 1-17, but not for months 18 onwards.
  • A restriction applies regarding the location of temporary workplaces. The restriction classes two work places as one if they are close together, even if they are otherwise unrelated, eg different clients. The example given by HMRC in their guidance is of a contractor working at one bank in the City and then moving to another in the same road – these workplaces would be treated as the same place for the 24 month test.

Subject to this, travel costs by rail, ferry, public transport, own vehicle or air may be claimed, as can related accommodation and subsistence.

 


Flat Rate Expenses

These are available in three circumstances.

 

Nights Away

UK £5 a night and overseas £10 a night – these are for incidental costs of staying away, and can be claimed in addition to other receipted costs.

 

UK Subsistence Away at Temporary Workplace / Travelling on Business

Within the UK if working at a temporary workplace, or travelling on business, then in respect of  meals and subsistence either receipted amounts can be claimed, or HMRC have produced a table of flat rate expenses. Guidance on the scale rates can be found at:  Exemption for amounts which would otherwise be deductible: payments at a benchmark rate

Amounts are:

Journey time of at least Maximum meal allowance
5 hours £5
10 hours £10
15 hours (and ongoing at 8pm) £25
Where a scale rate of £5 or £10 is paid and the qualifying journey in respect of which it is paid lasts beyond 8pm a supplementary rate of £10 can be paid

 

 

Flat Rate Costs for Travelling Abroad on Business

These are set out by HMRC at Expenses rates for employees travelling outside the UK

 


Cars, Vans, Motorcycles, Cycles

There are special rules for taxing company owned cars which are available for private use by directors/employees. These involve a benefit in kind being derived based on the original list price of the car and the vehicles CO2 emissions level. A further benefit is charged where fuel is provided for private use.

It is nearly impossible to argue that any car owned by your company is not available for private use. Even if insured for business use only, if it is parked at or near your home overnight then it is considered available for private use.

This generally makes it inefficient for your company to own your car – it is better for you to own the car and claim for business journeys at tax approved rates.

The tax free mileage rates that can be used are (2020/21):

First 10k miles PA 45p per mile
Over 10k miles PA 25p per mile
Passenger miles 5p per mile  – available for each passenger other than driver

These rates can be claimed on mileage which falls into the Eligibility of Travel and Subsistence Expenses criteria above.  It is recommended that a mileage log be kept showing total miles, business miles, private miles and details of journeys.

VAT can be recovered on the fuel element of the mileage amount, and HMRC publish a table of the deemed fuel only cost per mile. You must have a VAT receipt for the fuel.

There are different rules for vans and motorcycles:

Vans – in most circumstances private use is tax free so long as it is incidental to main use of the vehicle for the users employment. If it is not incidental to main use then there is a benefit in kind charged.  Generally a company owned van is only cost effective if there is a business need for it; otherwise own it privately and claim mileage as above.  Where the van reflects a business need and its owned by the company then:

  • VAT on purchase may be recoverable, and payable on sale
  • All expenses can be deducted for tax and vat
  • Capital allowances can be claimed on the purchase price

Motorcycles and cycles – the benefit is 20% of the market value when first acquired, apportioned for the private / business use proportion.  Running costs are similarly proportioned.  Optionally for motorcycles and cycles owned personally (rather than company owned) mileage rates can be used tax free as follows:

 

Motor cycles 24p per mile
Pedal cycles 20p per mile

 


Working From Home / Home As Office Expenses

Read our separate guide on this topic