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Contractor's Calculators
Downloadable Guide

Expenses Introduction




"Expenses" is the general term for costs that you incur in the course of your work. The reason that expenses are important is that if you are operating as a Limited Company and you incur an expense in the course of your business, you can claim Tax Relief on that expenditure. That means you can deduct the cost of the expense from your taxable income or your company's taxable profits, and thereby reduce the amount of tax you need to pay.

As you would imagine, there are many rules about what costs can be put down as expenses. The overriding rule is that to be claimed as an expense, the product or service must "wholly and exclusively" for the use of your business and have no "duality of purpose" – ie, it must be solely for the use of your business, and completely for the use of your business. ("Incidental" non-business use is, however, allowed).



In a nutshell, deductable expenses reduce the total income or profit on which you or your company need to pay tax. For example, if you earned £50,000 in a given year, and did not declare any expenses, you would be liable for tax on the full £50,000.

However, if you had incurred expenses of £1,000 (on travelling for work, say), you could deduct that amount from your taxable income or profit – so you would only pay tax on the remaining £49,000.



It is the responsibility of the company director to keep hold of all receipts relating to expenses. Although your accountant will not need to see these, you would need them if the Inland Revenue ever decided to investigate your accounts. Since an Inland Revenue investigation typically goes back six years, you must retain receipts for six years.


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