When you are self-employed, you must be careful with what you try to claim as expenses, and keep every receipt you do claim for the next six years in case HMRC decides to open an investigation.
For an investigation, it is beneficial to have digital records because paper receipts fade, often fast. Rarely will a printed receipt be legible after a couple of years, let alone six years. If you do not have a subscription to bookkeeping or accounting software to upload screenshots of your business receipts, take a photo of the receipt and keep them all in a folder on your computer.
What Expenses Are Legitimate Business Expenses for Contractors
HMRC only offers guidance on what business expenses can be claimed because every business will have different overheads. In all cases, the wording that never changes is the “wholly and exclusively” part.
What this means is that any claims you make must be directly attributable to the revenue you currently bring in. You cannot claim training expenses or networking expenses to expand a business into a new area.
As an example, a wedding photographer could claim the ticket, travel, and accommodation expenses to attend a wedding photography conference. They could not claim training or event expenses for drone photography as that would be expanding into a new skill set.
Training or skills development is only tax-deductible when it directly relates to the existing skills you possess. You can only brush up on your existing skills. Learning new skills is not an allowable expense.
What About Clients Offering to Pay for the Training?
Clients may require their contractors to have up-to-date skills or knowledge of particular software or languages to expand their knowledge to cover a broader spectrum. As an example, a web developer with expertise in Oracle, MySQL, and Access may be asked about developing an app that requires Swift language training for iOS app development, and Java and C++ for Android app development.
App development and web development are two different categories. When a contractor’s revenue is wholly gained from web development, the training expenses are only an allowable expense when it is “wholly and exclusively” to expand or update existing skills. Not for gaining new skills. In other words, you would need to have invoicing clients paying for the skills you are using.
Should the skills bridge be a deal-breaker, it is not uncommon for a client to offer to pay the training fees as an incentive. The tricky part with accepting projects is that it can put the contractor within IR35, essentially working as a disguised employee. The reason is that large companies have a wider range of tax relief because they have more staff with various training needs that are far broader than a specific contractor would ever need.
Corporations can leverage large training libraries like LinkedIn Learning and offset the cost as a legitimate business expense because of the various skills their existing workforce has that require ongoing development. LinkedIn Learning and various other online training course libraries requiring membership fees are rarely specific enough to contractor requirements to warrant being classed as wholly and exclusive.
One difference that some platforms offer is additional advantages, which in the case of LinkedIn membership is training and networking for the one fee.
What that means is that whilst you may not be able to claim the whole fee for the training aspect, you can include the networking aspect as the fee includes (at time of writing) InMail credits, unlimited profile viewing, and salary and job insights.
Provided that throughout the tax year you were using LinkedIn to network with peers or for client acquisition, lead generation, or any other business advantage, the cost would be wholly and exclusive.
Why Tax Deductibles Differ for Companies and Contractors
The business advantage to companies using contractors is that they forego the need to train their workforce. Passing the benefit off in-kind to a contractor is not what is supposed to happen. Unfortunately, the tax relief burden is on the contractor and has nothing to do with the client-side. Where training fees become a benefit attached to a proposal, it would be wise to decline the offer or insist on paying the training fee wholly from the capital raised. The simplest way to accept a client offering to pay your training fees is to include the cost in the proposed quote and pay the fee yourself.
In practice, if you were to propose £1,000 as a fixed fee for the work proposed, and required an extra £500 to attend an event, or for training to beef up your skills then discuss with the client about including it on their invoice as a project-related expense. For record-keeping purposes, whatever amount you invoice for project-related expenses, attach receipts to the invoice to prove your expenses on that project. You do not need to prove your expenses to the client, but you do need to prove them to HMRC.
There may be discrepancies, for example, predicting the cost to be £500, when it turns out that your invoices only add up to £432.72. In such circumstances, when it is time to complete your tax return, the breakdown of income and expenses will be easier to report, as you will have the exact figures available. In the example used – billing £500 expenses that only cost you £432.72 – the difference would be £67.28 as taxable income, rather than the whole £500. Instead of being taxed on £1,500, you would be taxed on the net value of £1,067.28.
For your records, it is helpful to consider all the project-related expenses at the time you propose your price because there may be some fees that can be offset at the end of the tax year when you can tie the fees to a specific project.