Reply to: away from home.. claiming

[LisaContractorUmbrella]

I have one.. but i didnt understand the tax/revenue/profit stuff

As the Director of a Limited Company you have certain responsibilities and it's important that you realise that right from the start otherwise you could find yourself getting in one unholy muddle. Not every contractor is cut out to run their own company, in which case you have the option to work through an umbrella company instead, but you need to make sure that you give yourself the best chance possible. There are lots of guides on here and yes I know accountancy/tax don't make the best bedtime reading but you do need to understand what they contain. Your accountant will help you but your company is not their responsibility; if you don't understand what they're talking about then say so and ask questions until you do understand

[SueEllen]

away from home.. claiming

I forgot to add first time contractors always sit there with calculators.

In reality calculators cannot tell you the additional expenses of when you have to pay to get a taxi part way home, when you are forced to take a week off as the client has no work for you, etc.

Most importantly they cannot tell you the expense of having a contract pulled because a project is canned after a month and you have to look for another contract.

[SueEllen]

folks on here and the accountant!

You've got the wrong end of the stick.

Expenses work out neutral because they are for you to carry out your business.

In reality the less expenses you have the more profit your company makes. It is however better for you to expense something rather than pay it out of your own income, as the former is done before tax and the latter after tax.

However financial commonsense dictates if there is a cheaper alternative that is of the same or similar standard, you spend the money on the cheapest alternative rather than paying.

So if the free car park is as adequate as the paid parking, then you use the free parking. If your car is going to get scratched in the free parking due to narrower parking spaces and it's a luxury brand, then use the paid parking.

In the case of lunch it would probably cost you a couple of pounds to bring your lunch in compared to £5 to buy it. So even with the tax advantage of your business buying lunch, you would save over 20% (or whatever the corp tax rate is) by buying and bringing in your own lunch from home.

[cjonline]

Who ever gave you that advice is an idiot.

Only spend what you need. So if the free car park is fine use that.

folks on here and the accountant!

[SueEllen]

got you!

I suppose I've been giving advice to spend as much money as possible and claim it back, ie I've been paying for parking and lunches, but I could use the free car park and bring a sandwich in from home and maximize the net income. I suppose the same would also be for equipment.l. ie, why buy a laptop if I have one already.

Who ever gave you that advice is an idiot.

Only spend what you need. So if the free car park is fine use that.

[cjonline]

On those numbers, yes. The point is, expenses are supposed to be revenue neutral, i.e. if you personally are paying for stuff out of your taxed income that is actually a cost to the business you should not lose out the tax element that you personally are not liable for.

The basic line is that if you're making a profit (or a loss) out of your net expense claims then basically you are doing something wrong.

The far more sensible idea is to get YourCo to pay its own bills so it never goes anywhere near your income...

got you!

I suppose I've been giving advice to spend as much money as possible and claim it back, ie I've been paying for parking and lunches, but I could use the free car park and bring a sandwich in from home and maximize the net income. I suppose the same would also be for equipment.l. ie, why buy a laptop if I have one already.

[malvolio]

actually, I've been doing some figures of my own..

WITHOUT EXPENSES

billing - £18,000
salary - £5000
gross (taxable) - £13,000
@20% = £2,600

Net - £10,400

WITH EXPENSES

billing - £18,000
salary - £5000
expenses - £500
gross (taxable) - £12,500
@20% = £2,500

Net - £10,000

So, basically, yes I would pay less tax but my net income would be less when adding expenses.
Is this right?

C

On those numbers, yes. The point is, expenses are supposed to be revenue neutral, i.e. if you personally are paying for stuff out of your taxed income that is actually a cost to the business you should not lose out the tax element that you personally are not liable for.

The basic line is that if you're making a profit (or a loss) out of your net expense claims then basically you are doing something wrong.

The far more sensible idea is to get YourCo to pay its own bills so it never goes anywhere near your income...

[cjonline]

This example is exactly what im looking for

actually, I've been doing some figures of my own..

WITHOUT EXPENSES

billing - £18,000
salary - £5000
gross (taxable) - £13,000
@20% = £2,600

Net - £10,400

WITH EXPENSES

billing - £18,000
salary - £5000
expenses - £500
gross (taxable) - £12,500
@20% = £2,500

Net - £10,000

So, basically, yes I would pay less tax but my net income would be less when adding expenses.
Is this right?

C

[TheCyclingProgrammer]

I don't think so.

You have VAT coming in and you pay VAT to the Revenue. The difference is earnings, subject to CT.

On the flat rate scheme, but on the normal scheme what Andy said is essentially correct.

[Cirrus]

T the only exception is VAT (which more or less stays in it's own ring fence

I don't think so.

You have VAT coming in and you pay VAT to the Revenue. The difference is earnings, subject to CT.

[handyandy]

The simple answer is that expenses incurred wholly and necessarily in the course of business are a business expense and you pay them out of your gross revenue (i.e. earnings) before anything else happens (e.g. corp tax, dives, salary, PAYE) - the only exception is VAT (which more or less stays in it's own ring fence as you are simply a tax collector for HMRC).

The real question you need to ask is 'is it worth it'.

Maybe I could give a practical example form my own experience (about 7 years ago as I've since gone perm)...

I've always worked in London and lived close enough to commute each day (just) - mix of perm and contracts over a long period. All of a sudden the other half dream job came up and we decided to move to another part of the country and that put me out of reasonable commute distance (2+ hours each way).

After looking for a 'local' job and finding they paid about 25-30% of the London roles I could get we decided to 'live together, apart' during the week (i.e. I commute to the smoke and work and live there monday to friday then come back for the weekend). Sometimes it's possible to get a friday working from home but not always. This worked well for me and I've loved it - but it's not for everyone.

What made this worth while was the day rate on the contract was very good (over £700 per day) and I rented a one bedroom flat. With energy, council tax, rent and travel costs back and forth each week I was claiming expenses from my ltd. of around £2k/month!

But if you are grossing ~£150k per year then taking £25k off of that is not bad. You'd need to be getting a contract day rate of nearly £570 living close to your home. SO practically speaking that's the way you should look at it from a pure financial viewpoint - 'gross invoices (exc. VAT) away from home' - 'gross expenses of living away' need to be >= 'gross invoices of job near home'.

Of course, that analysis does not take into account whether you want to live that type of lifestyle - I loved it other people would end up having a breakdown (and to be honest at a different stage in my life and relationships I probably would have done!).

The thing you should not do is take a job that will require you to pay high levels of expenses simply for a tax break. You may also find that the high level of expenses draws HMRC attention (though with me it did;t and I'd guess that's because the net was still quite high so they still got a good level of corp tax, etc. from me).

Hope that helps put your thought process into a more realistic setting.

[LondonManc]

I have one.. but i didnt understand the tax/revenue/profit stuff

It's very simple at our level.

Revenue - Cost = Gross Profit

Gross Profit - Corp Tax = Net Profit

Let's say revenue is fixed at 110,000 and salary at 10,000

Case Study A:
Costs - if you're staying away, you could slum it in a dodgy B&B and use Megabus and incur 5,000 costs
Therefore your Gross Profit is 95,000 (110 - 10 - 5),
Therefore your Net Profit is 95,000 less 20% of it, 76,000

Corp Tax is 20% of that.

Case Study B:
Costs - you're staying away but fancy the Monday morning train to London and Friday back, both peak plus four nights in a decent hotel. That's 600pw, rolling up to, say, 25k for the year.

Therefore your Gross Profit is 75,000 (110 - 10 - 25)
Therefore your Net Profit is 75,000 less 20% of it, so 60,000

Your obsession with Corp Tax is misplaced. It sounds like you've got Corp Tax as the silver bullet to be reduced based on misunderstanding of it.

Option C, you take a lower paid contract near home:
Revenue 60,000 Salary 10,000, Costs 2,000 (bus fare there and back)

So, 48,000 gross profit, 9,600 corp tax, net profit 38,400. And that's the bottom line!!!

Obviously I'm simplifying it because bringing things like VAT and dividends into it will confuse you further, but stop worrying about accountancy unless you want to become an accountant.

[mudskipper]

As this is travel cost, you will need to be aware of the new SDC legislation when this comes in from April 2016.

If he's operating via a brolly, otherwise it is IR35

[wantacontract]

don't mean to be harsh...

but you don't understand that stuff...

ffs go and understand it then...it's not rocket science.

[cjonline]

Get yourself an accountant!

I have one.. but i didnt understand the tax/revenue/profit stuff