Limited Company Contractors

The company is now registered with Companies House and HMRC, you have opened a company bank account, organised your business insurance and appointed an accountant – the company is now ready to begin trading. This section will outline the process of issuing invoices to your clients and some of the conditions that must be met to successfully claim some of the most common expenses incurred by contractors.

Invoices

In order to receive payment for the services provided to your clients, you will need to issue an invoice to the client or agency.

An invoice should contain the following details:

• Company name, address and registration number;
• VAT number;
• Invoice date;
• Client/Agency name and address;
• Description of services supplied.

Self-Billing

If you provide your services to your end client via an agency, they may be operating a ‘self-billing system’ whereby the agency creates an invoice for you based on a submitted timesheet. This is beneficial as it reduces the administrative burden of having to create invoices, and also speeds up the payment process from the agency.

If your agency does operate a self-billing system, HMRC regulations require VAT calculations and accounts to be prepared using the self-bills and so you should not create your own invoice if using a self-bill system.

Limited Company Expenses

If you incur expenses then these can be claimed from the company if they have been incurred ‘wholly and exclusively’ for the purpose of trade. Some typical expenses incurred by contractors along with any associated conditions to making a successful claim are detailed in this section.

Business Travel

If you incur expenses travelling to client sites in order to fulfil your contractual obligations, the costs of doing so may be claimed from the company providing that it is to a temporary workplace, where you go to perform a task of limited duration or purpose (known as the 24 month rule) and not simply ordinary commuting. The most frequent claims for travel expenses are for public transport tickets, taxis can be claimed in circumstances where public transport is not available but should not be excessive.

If a worker uses their own vehicle for business travel, a mileage allowance can be claimed from the company to cover the cost of fuel, depreciation, insurance and any other running expenses attributable to the business travel. The rates are set out below:

Subsistence
The cost of lunch can be claimed when working at a temporary workplace. This must be in the form of a pre-packed sandwich or a meal at a cafe, the cost would not be allowable if the employee was simply reimbursed for the ingredients to prepare his/her own packed lunch.

If you are staying overnight on business away from home at a temporary workplace, you may also claim for the provision of breakfast, an evening meal and a ‘flat rate’ un-receipted subsistence allowance of £5 per night (£10 per night if working overseas) to cover small incidental personal expenses such as laundry, newspapers etc.

Accommodation

If it is necessary to stay away from home in order to work at a client’s site, any costs incurred can be claimed from the company and will be deductible for corporation tax purposes. It should be noted that the accommodation claimed must be separate to the employee’s permanent residence in order for it to be allowable and the employee should not be accompanied by family.

As with any claims, the expense should be incurred ‘wholly and exclusively’ for the purpose of business and whilst there is no specific limit to the cost of accommodation, the standard of accommodation provided should not exceed that of the employee’s primary residence so not to be seen as a reward for the employee’s service.

In many instances, a short term lease on furnished accommodation (e.g. flats) can be obtained as a cheaper and more convenient alternative to hotels or guesthouses. Provided that the total cost of the accommodation is appropriate to the business need and does not exceed the cost of a hotel of appropriate standard, the claim will be allowed.

Use of home as office allowance

If you use part of your home as an office, either to perform duties involved in the contract with your client or to carry out administrative work to run the business, you may claim an allowance for using part of your home as an office. The simplest way to do this is to claim the ‘flat rate’ allowance of £18 per month (£216 per annum) as no receipts are required.

Accountancy Fees

As it is a legal requirement for companies to prepare financial statements and tax returns; accountancy fees therefore meet the criteria of being wholly and exclusively a business expense. One thing to note however is that fees incurred in the preparation of self assessment tax returns would not be a business expense and should therefore be paid personally – at Nixon Williams, we will prepare a basic return free of charge for our clients where we receive details (self assessment questionnaire) by 30th September following the end of the tax year (subject to when in the tax year you became a client).

Mobile Phone Costs

The provision of one mobile telephone per employee is not classed as a benefit in kind and is deductible from the company’s profits for corporation tax purposes. The benefit in kind exemption covers the telephone itself, any line rental and the cost of private calls paid by the employer on the telephone. To qualify for this, the contract must be between the mobile provider and the company (the company name should therefore appear on all phone bills) and payment for the phone must be made directly from the company bank account.

Internet Connection

It is possible to claim for the cost of an internet connection at your home if the following conditions can be met:

• The contract must be in the company name and the payment must be made directly from the company’s bank account.
• There is no separate billing record between business and private connections (if there is then only the business connection can be claimed).
• Private use must not be significant.

Training Costs

Costs associated with updating or enhancing an existing skill can be treated as a company expense. They will be allowable for corporation tax and will not create any benefit in kind or associated personal tax charge. There should be an expectation for the skills or personal qualities improved through training to be useful in the performance of the employee’s duties.

If the purpose of attending training is to acquire a completely new skill, the cost can be treated as capital expenditure which can then be written off against any future revenues generated as a result of having the new skill. The company may be able to claim capital allowances for expenditure of this nature.

Other costs associated with training such as travel or accommodation (if the training is being carried out at a temporary location away from the employee’s normal workplace or residence) will also be allowable.

Business Entertaining

If you incur costs entertaining a potential client with the intention of winning a particular contract or extending a current contract, the costs incurred in doing so can be claimed from the company. Please note however that expenses of this nature are not deductible for corporation tax.

Any costs of entertaining should be commercial, reasonable and the company should expect to generate future revenues as a result of the expenditure taking place. For example, to spend £5,000 on corporate hospitality at a major sporting event for a potential customer if it would only generate a few hundred pounds of income would not be seen as reasonable.

Even though entertaining expenses are not deductible for corporation tax, it is still worth claiming these costs from the company because if they are paid from your personal income, this will be after having paid personal tax.

Annual Events

An annual event is an allowable expense for the company and is treated as a tax free benefit for any employees providing the following conditions are met:

• The total cost must not exceed £150 (inc. VAT) per head, if the cost does exceed this limit then the entire cost will be treated as a benefit in kind;
• The event must be open to all staff;
• You may invite a partner, but if partners are invited, all staff must be entitled to invite a partner – invited partners will also be given an allowance of £150 per head.

You may have more than one annual event in a year, though you must be able to justify (if questioned by HMRC) that they are genuine annual events i.e. a summer barbeque, a winter ball etc. rather than just a night out for your employees every now and then. If multiple events are held, the total cost of all events added together must not exceed the £150 per head allowance.

Childcare Costs

There are two mechanisms by which the company can provide for childcare costs:

1. Direct Agreement – this is where the company agrees with a registered childcare provider to purchase childcare and to provide it to the employee. A simple letter stating that your company agrees to purchase childcare on behalf of the employee is sufficient evidence of the existence of such an agreement.
2. Voucher scheme – the company purchases vouchers from a childcare voucher scheme provider and issues the vouchers to the employee who then uses the vouchers towards their childcare costs. Scheme providers usually charge an administration fee for this, typically 2 – 5% of the voucher’s face value.

To qualify, the following conditions must be met:

• The child or stepchild must live with you;
• The child or stepchild whose maintenance you contribute (either in full or in part) is yours;
• The child qualifies up to 1st September after their 15th birthday (16th birthday if they are disabled); and
• The childcarer must not be related to your child, even if they are registered or approved, unless they run a childcare business and look after other children that they are not related to.

If an employee’s child requires some form of care whilst the employee is working, the employee can claim an allowance towards this from their employer, the amount claimable is dependent upon the employee’s tax position – the employer must carry out an earnings assessment based on the employees anticipated salary for the year (the assessment therefore excludes dividends), the amount payable in each scenario is outlined in the table below:

For more information

If you have any questions about contracting, becoming a contractor, starting a limited company or Nixon Williams, please contact our new business team on 01253 362 062.