Dear Contractor Doctor,
I’m a South African IT specialist and planning to come to work in the UK as an IT contractor. I’ll either be working through an umbrella company or my own contractor limited company. I’ve been researching UK business expenses rules for both trading options and am confused about what expenses I will be able to claim.
I’ve never worked in the UK before and will have the cost of my flights, plus the cost of rent, meals and other travel costs when I arrive to start work on a contract.
Can I claim flights, rent and food as business expenses?
Contractor Doctor says:
Contractors coming to the UK from overseas to contract, and who choose to use typical trading solutions – such as UK contractor limited companies or umbrella solutions providers – are subject to the same expenses rules set by HMRC for UK contractors.
According to HMRC’s rules, contractor expenses can only be claimed, and offset against a contractor’s tax liabilities, if they are wholly, necessarily and exclusively incurred in the performance of business duties.
Expenses that expat umbrella contractors can claim
Rob Crossland, Chief Executive of PAYE (Pay As You Earn) umbrella company Parasol, says that a contractor arriving in the UK and choosing to contract under a PAYE regime, such as an umbrella company or agency payroll, must abide by the same expenses rules that apply to regular permanent employees of any other UK businesses.
“If the overseas contractor arriving to contract chooses to work via a UK-based umbrella company, they become a UK-based employee of that umbrella’s business,” he says. “That means they have all the rights, obligations and rules that being an employee in the UK entails.
“So the contractor’s flights into the UK and rent for a residence on arrival won’t qualify as expenses. Once in a contract, the contractor can claim travel expenses from their UK residence to the client’s site, as well as subsistence during the day, as long as the contractor keeps all receipts and HMRC’s scale rates are applied.”
If the overseas contractor arriving to contract chooses to work via a UK-based umbrella company, they become a UK-based employee of that umbrella's business
Rob Crossland, Parasol
Crossland warns expat contractors that the cost of renting a residence in the UK, maintaining a home office and other costs like broadband and weekend and evening meals are not covered by HMRC’s scale rates. They would not be allowed as expenses by HMRC and, when it comes to expenses like business calls, only itemised and costed calls can be expensed.
Contracting in the UK trading via a limited company – is it for you?
So what’s the situation for expat contractors who choose to contract via their own limited company?
Contractor accountant ClearSky’s Managing Director, Derek Kelly, suggest newly-arrived contractors first consider the length of their stay before committing to a trading option. “Contractors arriving from Commonwealth countries, such as South Africa, are most likely to have a working visa that lasts two years,” he says. “If a visiting contractor’s stay is likely to be under two years, then the costs and responsibilities of starting and running a contractor limited company probably outweigh the tax advantages.”
If a visiting contractor's stay is likely to be under two years, then the costs and responsibilities of starting and running a contractor limited company probably outweigh the tax advantages
Derek Keyy, ClearSky
But Kelly suggests that, if the visiting contractor is planning on making their stay permanent, perhaps qualifying according to the points-based system as a highly skilled worker, the longer-term commitment of starting and running a contractor limited company can be more tax efficient and give the contractor greater returns from their contracting income.
Allowable limited company expenses for expats
“Flights to the UK and subsistence can in certain circumstances be claimed as a pre-incorporation expense, as can business start-up costs like company registration, marketing and office equipment,” explains Kelly. “Once the company is incorporated, the contractor will almost certainly become a PAYE employee of that company, and HMRC’s expenses rules for company employees will apply.”
Kelly continues: “The contractor won’t be able to claim for rent, but can claim expenses in exactly the same was as any other limited company contractor can. So the cost of a home office and equipment, marketing, communications, travel and receipted subsistence according to HMRC scale rates, accountancy & insurance and even certain training expenses will all be eligible as expenses.”
In addition to enjoying the tax mitigation benefits of contracting via a limited company, Kelly warns newly arrived contractors that they must maintain detailed expenses records, including keeping all receipts and invoices, particularly as it’s unlikely a newly incorporated limited company will qualify for a dispensation.
“A reputable specialist contractor accountant will be able to advise a newly arrived contractor about their trading options and allowable expenses,” says Kelly. “If a PAYE umbrella is deemed to be the best option, then the contractor should expect similar advice from their umbrella company.”
Good luck with your contracting!