As a contractor, maximising your allowable tax free expense claims is an important part of keeping your tax liabilities down. However, ensuring all expense claims are tax compliant is very important. Here is a list of 10 mistakes to avoid when claiming tax free expenses.
1) Never use your Company Bank account for Personal Expenditure
It can initially be hard to get your head around but it’s crucial to remember that your limited company is a separate legal entity to you. All monies in the company bank account are legally owned by the company. This means they can generally only be paid to you either in the form of remuneration for work you carry out or for the reimbursement of allowable business expenses. You should not view your company bank account as an extension of your personal bank accounts to pay for whatever non-business related expenditure that you wish.
2) Ensure you know where your “Normal Place of Work” is
Identify where is your “normal place of work” according to Revenue Guidelines. Do not claim mileage to and from your home and your “normal place of work”. Do not claim subsistence for time spent at your “normal place of work”. Ensure mileage claims are calculated by reference of the lesser of the distance between your home and normal place of work or your normal place of work and your temporary place of work.
3) Do not claim more than the allowable rate per km in your Mileage Claims
If you are using the civil service rates for mileage claims, track your mileage cumulatively each calendar year and ensure that you reduce your claims to the lower allowable rates after you exceed more than 6,437km each calendar year. The rates reduces by approximately 50% after you exceed 6,437km. Forgetting to reduce the amount per km that you are claiming can be an extremely expensive mistake to subsequently rectify.
4) Different Subsistence Rates apply for Travel Outside of Ireland
Usually these are higher than the Irish rates. Don’t forget to adjust your flat rate subsistence claim for foreign travel, or you may be claiming less than you are entitled to.
5) Paying Salaries to other Individuals
Do not remunerate other directors and employees by amounts which Revenue may consider excessive compared to the actual work/duties carried out for the company. Any remuneration paid to someone other than you as the main contractor, must be paid at a level which reflects their hours of work, relevant qualifications and experience and the market rate that person could expect to be paid for the same role elsewhere. Revenue deem excessive remuneration as a likely tax avoidance scheme. This is due to a number of cases where they have found companies using it as a mechanism for the main contractor to withdraw funds from their company using another person’s tax credits and allowances.
6) Match Expenses Payments to completed Expense Claim Forms
Only take expenses payments from the company where you have a fully completed corresponding expense claim form. For example, do not withdraw various cash amounts which you plan to offset against future expense claims. This can be a slippery slope, especially if the expected future expense claims do not arise. Also if you withdraw money from the company with a view to using it for future expenses which do not arise straight away, this is an interest free loan from the company to you and a Benefit In Kind tax charge arises. Prepare your expense claim form first and then make one bank transfer to your personal account to reimburse yourself for the total amount listed on your claim form.
7) Not all Entertainment Expenses are Allowable
Do not fall into the trap of thinking that because you own a company, you can expense various lunch, dinner, drinks and general hospitality costs. Whilst it might be tempting to take friends or family out for a meal “on the company”, this is not an allowable expense. Only business entertainment costs may be claimed as a tax free reimbursement from your company. Business entertainment costs are allowable to the extent that they relate to the provision of hospitality for clients, potential clients, suppliers or other business associates. You must keep records to prove the business purpose of the expense and the business relationship of the persons entertained. Check out our full guide on Claiming Business Entertainment Expenses which also explains how the tax relief works.
8) Claiming Rent for a Home Office
A home office is a specific area of your home which is used regularly and exclusively as a place of business. If you work from home but primarily just from a laptop on your kitchen table for example, this does not qualify as a home office. A portion of your rent should only be claimed as a home office expense where you have a specific designated space in your home used just for business.
Another important factor is the actual usage of the home office. The mere existence of a home office in itself would not justify an expense claim. There would have to be significant business related activity carried out in the home office to satisfy a genuine claim for home office expenses.
Check out our full guide on Home Office expenses which explains more about what can and can’t be claimed.
9) Purchasing too much Computer Equipment
Don’t claim computer equipment purchases which are not related to performing work for your company. Revenue will question the validity of purchases of laptops, tablets and other gadgets if they seem to be excessive in the context of a one person contractor company. Remember that in the event of an audit, they will generally review multiple years and may question patterns of regular purchases of equipment.
You must be able to demonstrate how the item is used in the performance of your work. If there seems to be an overlap between the functionality of different items of equipment, you must be able to demonstrate why multiple pieces of equipment are needed by the company.
10) Meeting the Criteria for Relocation Expenses
Relocation expenses where allowable can result in significant tax free reimbursements from your company, including up to 3 months rent. It is important to be aware that in order to be allowable, a number of criteria must be met. Moving house must be necessary in the circumstances in order to be able to take up employment at a new location. This generally means that a move of a significant distance should occur. For example, it is not sufficient to just move from one side of a city to another. Whilst it may be more personally convenient for you to live closer to your place of work, remember that in order to qualify as tax allowable relocation expenses, the move must have been necessary to enable you to take up the work.
