Newbie: Understanding Tax Deductible

[jedzi]

I've just started contracting and I want to make sure I'm clear on exactly what tax deductible means, particularly with expenses. I've hunted round and found basic definitions, but I want to understand how it affects what I get in my pocket, compared to life as a permie:

(For info: I'm working outside IR35, through my own limited company, registered under the flat rate VAT scheme).

My understanding is that if I / the company buys something I can deduct the tax on that amount from my corporation tax bill. So if I / my company buys something for £100 my corporation tax bill reduces by £20, meaning that effectively I have to earn £80 to buy something for £100, (assuming I’m taking as much as possible as a dividend).

As a permie to buy something for £100 I have to earn very roughly £150 (ie £100, + 40% Income Tax, + NI). I’m ignoring pensions and the vaguaries of NI & income tax bands.

Have I got that roughly right?

Jedzi

[northernladuk]

But if you incurred expenses as a permie you get it all back so costs you nothing???

Also it is only tax deductable if it is wholly and exclusively for company use. As a permie you don't generally need to buy stuff like that. I think you are comparing apples and pears here unless you are thinking about personal stuff.

I am a little concerned about where you are going to end up with this one.

When you are talking about buying something can I just be a pedant here. If your company buys it, it belongs to the company. Not you. If you buy it as a permie it belongs to you. Pedant I know but thinking like that will clear alot of questions you may have later about what is and what isn't acceptable to buy through the company.

Some examples might help.

[Nixon Williams]

My understanding is that if I / the company buys something I can deduct the tax on that amount from my corporation tax bill. So if I / my company buys something for £100 my corporation tax bill reduces by £20, meaning that effectively I have to earn £80 to buy something for £100, (assuming I’m taking as much as possible as a dividend).

As a permie to buy something for £100 I have to earn very roughly £150 (ie £100, + 40% Income Tax, + NI). I’m ignoring pensions and the vaguaries of NI & income tax bands.

Have I got that roughly right?

Jedzi

Broadly you are correct, however you would only get tax relief on items that you need to operate your business, such as stationery, mobile costs, accountancy fees etc - so you need to be aware that your company (and so you) has to foot 80% of the cost.

It is not a case of simply gathering as many receipts as you can find and think that they can all be claimed, only costs incurred in operating your company are eligible.

Alan

[Clare@InTouch]

Tax deductible means your company can claim the value as an expense. Say you have sales of £10,000 and allowable expenses of £2,000 - you'll pay 20% CT on the remaining £8,000.

The rules around what's allowable and what's not are difficult at times, not always logical, but sometimes obvious! If you need it (wholly and exclusively) for business then you can generally claim it, although if there's a personal benefit to it (gym, healthcare, clothes) then there will be a personal tax implication via a benefit in kind. There are some exceptions such as pensions and childcare that, although you personally benefit from them, are not benefits in kind.

If it's your first year then I'd recommend you at least talk to an accountant, just to get a grounding. Choose one you can get on with and who will answer all your questions, and explain the various taxes etc in plain English.

And to echo NLUK above, one of the most important and fundamental concepts that you absolutely must get right is that you and your company are totally separate things. The company bank account belongs to the company, go careful to keep things tidy in that regard or you'll get into a mess pretty quickly.

[jedzi]

Newbie: Understanding Tax Deductible

But if you incurred expenses as a permie you get it all back so costs you nothing???

Also it is only tax deductable if it is wholly and exclusively for company use. As a permie you don't generally need to buy stuff like that.

I understand the difference between the company and myself and also that it has to be 'wholly and exclusively' for company use. However there are some things that you can claim for as a contractor that you have to buy anyway as a permie and its this kind of thing that I'm trying to get my head round.

For example my accountant's advised me that lunch is tax deductible when on site. I had to buy that out of my 'taxed' pocket as a permie and I'm trying to work out if things like my this have suddenly become far cheaper (as there's none of the NI & Income paid on it that there was when I was a permie).

I've just bought a new briefcase which I've been told I can claim for. There are a few other things which if they've just effectively become far cheaper I might invest in now as well (eg a new laptop).

Regards,

Michael

[BlasterBates]

I understand the difference between the company and myself and also that it has to be 'wholly and exclusively' for company use. However there are some things that you can claim for as a contractor that you have to buy anyway as a permie and its this kind of thing that I'm trying to get my head round.

For example my accountant's advised me that lunch is tax deductible when on site. I had to buy that out of my 'taxed' pocket as a permie and I'm trying to work out if things like my this have suddenly become far cheaper (as there's none of the NI & Income paid on it that there was when I was a permie).

I've just bought a new briefcase which I've been told I can claim for. There are a few other things which if they've just effectively become far cheaper I might invest in now as well (eg a new laptop).

Regards,

Michael

Yup you are getting the hang of it. You can only claim expenses like meals and so on if you're working away. If you were working as a permie consultant, your company will also give you a daily allowance for lunch and evening meals as well as paying your hotel bill.

However you won't be able to claim this after two years as HMRC will expect you to move to your new permanent place of work.

Also as a permie you will be issued with equipment, i.e. laptop and bag which would be given to you by your organisation.


In effect there is no difference between you and a permie, it's just you are an employee of your own company and you can offset costs that normally your organisation would cover if you were working for them.