Inside IR35 Expenses – Understanding What Your Business Can Claim

Since coming into force on April 2021, IR35 has been a bane for contractors and employers alike.

Designed to stop tax avoidance by employees that are designed as freelancers or contractors, this legislation had changed the way that contractors are hired and assessed for each role. 

We’ve talked before about how to avoid IR35 – but if you’re classed as being inside IR35 you need to know what that means and what inside IR35 expenses you can claim to ease the burden. 

Being inside IR35 

If you are classed as being inside IR35, then you are viewed as an employee for the contract or project that you are currently working on.

This classification would have happened because you have a long-term and permanent commitment to the company or have an obligation to receive and complete work on an ongoing basis.

For example, if you’ve agreed to provide IT services for a set amount of months for a company, you could be classed as an employee. 

Being classed as an employee in this way does come with a few benefits, including holiday and sick pay, as well as access to pension schemes and redundancy pay.

However, being classed as inside IR35 means that you’ll be taxed more than if you were outside of IR35. For the contact that you are inside IR35, you will have to pay PAYE Tax and National Insurance before receiving the net pay and pay employment taxes on the income through a self-assessment tax form. 

Depending on what company you’re working for while inside IR35, you might be eligible for 5% expenses for the running of your company. 

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5% expense rule now only applies to small businesses

Inside IR35 expenses have gone through a bit of a change, making it a little confusing about what you can claim.

Before these changes, every contractor inside IR35 could claim a 5% general expense allowance on the value of the contract, which was meant to cover costs like premises, stationery supplies, marketing, training, and professional insurance policies.

Contracters didn’t need to provide receipts for these expenses, it was automatically allowed on each contract.

However, this was scrapped for the public and private sectors unless the company is classed as a small business. So, if you’re inside IR35 for a small business, you can claim a 5% deduction of the total contract as expenses. 

The 5% expenses should go towards the general running of your business, and can include: 

• Office costs
• Equipment
• Accountancy and tax advice
• Business development costs
• Printing, postage, and stationery
• Other office equipment or materials
• Telecoms, i.e. phone contracts
• Insurance, including public liability insurance
• Bank charges
• And more

If you’re ever unsure about what you can claim for, just get in touch with your accountant – or take a look at our best-reviewed online accountants to lend a hand. 

The inside IR35 expenses you can benefit from 

There aren’t a lot of expenses that you can claim for being inside IR35 unless you qualify for the 5% general expense rule by working with a small business. However, there are a few areas that you can benefit from, no matter which size of business you are working for. 

Just remember that any expense must be “wholly, exclusively, and necessarily” for your work. 

Pension Contributions 

Being caught inside IR35 can significantly increase your income and national insurance tax contributions, reducing your take-home pay. However, if you direct a portion of your income into a pension, you can offset some of the tax increase while filling out your retirement nest egg. 

Pension contributions qualify for tax relief of up to £40,000 per year. This means that for every pound you contribute, you could potentially reduce your taxable income by the same amount.

Travel costs 

If you are inside IR35, you cannot claim for travel to and from your client’s place of work. This is because being inside IR35 means that you are seen as an employee, thus this journey will be classed as a normal ‘commute’ and thus cannot be expensed. 

However, if you have to make additional journeys for this contract, such as travelling to another site, meeting prospects, or collecting equipment, you can claim for these costs as they are outside the ‘normal commute’. 

Professional Subscriptions 

If you have to pay any fees for professional bodies or unions as part of your work, you can expense these fees. 

Training 

Training courses can be expensed if they help you maintain or improve the skills that you need for your role. 

Equipment

If you’re using specific equipment for your job that isn’t provided by the client, and you need to source yourself, then the cost of this equipment can be expensed. 

Personal protective equipment (PPE)

If any PPE is required for your work and is not supplied by the client, you can claim the expense.

Home office costs

If you work from home, you may be able to claim for limited expenses for utilities and internet costs. 

Professional indemnity insurance.

If professional indemnity insurance is mandatory for your contract, then you can expense for the premium cost.

Claiming expenses outside of IR35

If you’re working outside of IR35, you can claim expenses for your company as normal.

To help you out in these areas, we’ve put together these all-inclusive guides on: 

• What expenses a sole trader can claim in the UK
• What are allowable expenses for a limited company in the UK? 

For more help and information on your expenses, we’d recommend speaking to your accountant and keeping a detailed record of your books using accounting software. 

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