Allowable Business Expenses for Outside-IR35 Contractors

Allowable business expenses for outside-IR35 contractors

Running your own limited company brings genuine tax advantages, but only if you understand what counts as an allowable expense and how the IR35 rules affect travel and subsistence claims. This guide walks through the current HMRC position for contractors operating outside IR35, and where the rules change if a particular engagement is caught by the intermediaries legislation.

This is general education on how the rules work, not advice on your own situation. Whether a specific cost is deductible for your business depends on your facts, so always check with a contractor accountant before submitting a claim.

What counts as a business expense through a limited company

HMRC's collection of guidance on allowances, expenses and reliefs when you run a business confirms that a limited company may be able to claim allowances, expenses and reliefs to reduce Corporation Tax, VAT or National Insurance contributions. In practice, that typically covers costs that are wholly and necessarily incurred for the purposes of the business: things like accountancy fees, professional indemnity insurance, business equipment, software subscriptions, and use-of-home costs.

HMRC's guidance on expenses for the self-employed is aimed at sole traders but is a useful reference point for the type of cost that is generally recognised as a legitimate business expense, including business-premises costs such as heating, lighting and business rates where relevant. Limited company contractors should still apply company-specific rules (rather than the self-employed regime) when deciding what their own company can claim, but the underlying principle, that costs must relate to running the business rather than personal life, is consistent across both.

Common categories contractors typically look at include:

• Accountancy and company administration costs
• Business insurances (professional indemnity, public liability)
• Equipment and software needed to deliver the contract
• Training directly relevant to the services provided
• Employer pension contributions made by the company

Each of these needs to be assessed against HMRC's rules on wholly and exclusively business costs, and a contractor accountant is best placed to confirm treatment for your company.

Why travel and subsistence work differently for contractors

Travel and subsistence is the area where outside-IR35 contractors most often get caught out, because the normal expense rules are modified when a worker is engaged through an employment intermediary and the intermediaries legislation (commonly known as IR35) needs to be considered.

HMRC's guidance on travel and subsistence expenses for workers engaged through employment intermediaries from 6 April 2016 sets out that, from that date, where these travel-and-subsistence provisions apply, workers cannot claim tax relief or NIC disregard for ordinary commuting costs. That includes meals and overnight accommodation associated with that commute. HMRC is explicit that these rules are modified specifically for workers providing services through an intermediary where the intermediaries legislation needs to be considered.

The practical effect is that a contractor's ordinary commute to a client site is generally treated in the same way as an employee's commute would be, rather than as a deductible business travel cost, once the intermediaries travel rules bite. This is a separate question from whether the engagement itself is inside or outside IR35 for tax purposes; it specifically concerns what travel costs can be relieved.

Expenses inside the deemed payment calculation

Where an engagement is treated as inside IR35 and a deemed payment calculation applies, HMRC's Employment Status Manual page ESM8325 explains that a deduction is allowed for expenses met by the intermediary that could have been claimed against income tax if the worker had been an employee of the client and had paid those expenses personally. ESM8325 notes this may include travel expenses incurred in respect of relevant engagements.

This is a narrower, specific mechanism within the deemed payment calculation, distinct from the general business-expenses rules that apply to a limited company's day-to-day trading costs. It only becomes relevant where the intermediaries rules apply to a particular engagement, and the detail of what can and cannot be included is fact-specific.

Why the client's IR35 view matters for expense treatment

The listing on a role, or a client's Status Determination Statement, may describe an engagement as one the client considers to sit outside IR35. That is the client's assessment, made under their statutory responsibility, not a determination made by this platform or by any job board. Where a client states a role is outside IR35, contractors should still treat travel and subsistence, and wider expense treatment, as something to check against current HMRC guidance and the actual working practices of the engagement, rather than assuming standard limited company expense rules automatically apply without restriction.

Because CEST outputs are not determinative on their own, and an SDS represents evidence provided by the client rather than independent verification, contractors weighing up expense treatment on a specific contract should get a proper contract and working-practices review rather than relying solely on how a role is labelled.

If you're comparing contracts, it can help to look at current outside-IR35 listings and day-rate benchmarks alongside expense treatment, since day rate and allowable costs both affect real take-home return.

Keeping records that HMRC expects

Whatever expenses your limited company claims, HMRC expects contemporaneous records: invoices, receipts, mileage logs, and a clear business rationale for each cost. This matters both for Corporation Tax purposes and, where relevant, for supporting any deemed payment calculation under the intermediaries rules. Good bookkeeping, usually handled through your contractor accountant, is the practical safeguard if HMRC ever queries a claim.

Getting the detail right

The rules around business expenses, allowable expenses, and the intermediaries travel restrictions interact in ways that depend heavily on your specific contract, client site, and working pattern. A qualified contractor accountant can confirm what your limited company can claim in general, and an IR35 contract reviewer can assess the specific engagement. For questions about employment rights rather than tax treatment, the Fair Work Agency is the relevant body to contact.

This platform does not determine, verify, or warrant IR35 status; the SDS is the client's legal responsibility. Contractors should take their own advice and consider IR35 insurance.