Can You Claim Expenses Under IR35?

One of the biggest financial hits when you're inside IR35 isn't just the extra tax, it's losing the ability to claim legitimate business expenses. Suddenly, costs you've been writing off for years become personal expenses that HMRC won't accept.

But it's not as simple as "inside IR35 means no expenses." There are still things you can claim, and understanding exactly what's allowed can save you thousands. Get it wrong, though, and you're looking at rejected claims, penalties, and potentially an investigation.

Whether you're inside or outside IR35 determines almost everything about how you handle expenses. Let's break down what you can actually claim in each situation.

The Fundamental Difference: Inside vs Outside IR35

When you're outside IR35, you're operating as a genuine business. Your limited company can claim almost any expense that's wholly and exclusively for business purposes. Travel, accommodation, equipment, software, training—if it's necessary for your business, it's usually claimable.

Inside IR35 changes everything. HMRC treats you as an employee for tax purposes, which means you're subject to employee expense rules. And employee expense rules are far more restrictive than business expense rules.

This is where contractors lose thousands. That daily commute to your client's office? Not claimable inside IR35. Your laptop? Probably not. Travel between client sites? Maybe, depending on the circumstances.

The 5% expense allowance you get when inside IR35 barely compensates for what you've lost.

What You Can Still Claim Inside IR35

Even when you're deemed an employee for tax purposes, your limited company still exists. That means genuine company expenses—costs of running the company itself—remain claimable.

Your accountancy fees are the obvious one. You still need accountants to file your accounts, manage payroll, and handle your tax obligations. These are company expenses, not employment expenses.

Professional indemnity insurance and public liability insurance stay claimable. You're required to carry these as a limited company, regardless of your IR35 status.

Business banking charges are legitimate company costs. Your business account fees, transaction charges, even overdraft interest if you use it.

Pension contributions made by your company are allowed and hugely tax-efficient. Employer pension contributions don't count as employment income, so they escape both Income Tax and National Insurance.

Office costs if you work from home can be claimed at a proportion reflecting business use. You can claim a percentage of your mortgage interest, utilities, council tax, and internet costs. HMRC has simplified flat rates (currently £6 per week for 25-50 hours work), but actual cost claims usually work out better.

Professional subscriptions to bodies relevant to your work remain claimable—think chartered status fees, professional memberships, union dues.

The 5% Expense Allowance. What It Actually Means

When you're inside IR35, HMRC allows you to deduct 5% of your contract income before calculating deemed employment income. This is meant to cover expenses you incur that aren't reimbursed by the client.

On a £60,000 contract, that's £3,000. Sounds decent until you realize what you've lost by being inside IR35 in the first place.

The 5% allowance doesn't require receipts or documentation. It's automatic. You either claim it or you don't. But you can't claim the 5% AND itemize specific expenses. It's one or the other.

For most contractors, the 5% allowance is the simpler option. Unless you've got substantial documented expenses that exceed 5% of your income, take the allowance and move on.

Travel and Subsistence: The Complicated Bit

This is where most IR35 expense confusion happens. The rules around travel and subsistence when you're inside IR35 are strict, frequently misunderstood, and aggressively enforced by HMRC.

If you're working at a client's site under their supervision, direction and control,the classic inside IR35 scenario, then your travel to that site is ordinary commuting. Ordinary commuting isn't tax-deductible. Ever.

It doesn't matter if the site is 100 miles from your home. It doesn't matter if you're only there temporarily. If you're attending that workplace like an employee would, it's commuting.

Business travel, on the other hand, is claimable. Business travel means travel from one work location to another, or travel from your office to a temporary workplace.

The critical test is whether the workplace is temporary. HMRC's rule: if you're at the same location for more than 24 months, or you're expected to be there for more than 24 months from the start, it's not temporary.

If your contract is genuinely project-based, you're working at multiple sites, and no single site exceeds 24 months, you've got a reasonable argument for business travel. Keep detailed records of where you worked and when.

Subsistence, meals and accommodation while traveling,follows the same rules. If the travel itself isn't claimable, the associated subsistence isn't either.

What You Definitely Can't Claim Inside IR35

Home to client site travel is the big one. This is ordinary commuting, regardless of distance. Contractors lose thousands here.

Meals during your normal working day aren't claimable unless you're on an overnight business trip away from your usual workplace.

Clothing isn't claimable unless it's specialist protective gear or uniforms with company branding that you wouldn't wear outside work.

Personal equipment used for work generally isn't claimable. Your laptop, your phone, your home broadband—these are things employees normally provide themselves.

The test HMRC applies is simple: would an employee in the same position be able to claim this expense? If not, neither can you.

Outside IR35: Far More Freedom

When you're genuinely outside IR35, you're back to business expense rules. The test is whether the expense is "wholly and exclusively" for business purposes.

Travel between clients, to networking events, to business meetings—all claimable. Travel from home to your usual place of work isn't claimable even outside IR35, but if you work from home and travel to client sites as needed, those trips are business travel.

Equipment and technology become fully claimable. Laptops, monitors, software subscriptions, mobile phones—if you need them for work, they're expenses.

Training and professional development are claimable when outside IR35. Courses, certifications, conferences, books, online subscriptions—all legitimate business expenses.

Subsistence on business trips is claimable at reasonable amounts. There's no statutory scale rate for limited companies, but HMRC's employee benchmark rates (currently £5 for 5 hours away, £10 for 10 hours, £25 for 15 hours) are a safe guide.

Marketing and business development costs are claimable outside IR35. Website costs, LinkedIn premium, advertising, networking event fees, entertaining prospective clients.

The Wholly and Exclusively Test

Even outside IR35, expenses must pass the "wholly and exclusively" test. This means the expense must be entirely for business purposes, not partly personal.

A laptop you use 80% for business and 20% for personal use fails this test. If there's any personal benefit, it's not wholly and exclusively for business.

In practice, HMRC accepts that some equipment has minor personal use. A mobile phone contract where you occasionally make personal calls is generally fine. A laptop where you sometimes check personal email is acceptable. But if personal use is substantial, you're in murky territory.

The safe approach: have separate equipment for business and personal use where possible. If that's not practical, lean conservative on what you claim.

Keep Everything Documented

Whether inside or outside IR35, if you're claiming expenses, you need evidence. HMRC can request documentation going back years, and missing receipts mean rejected claims.

For every expense claimed:

Keep the original receipt or invoice. Digital copies are acceptable, but keep them organized and backed up.

Note what the expense was for. "Lunch in London" isn't sufficient. "Lunch meeting with potential client X to discuss project Y" is.

For mileage claims, keep a log showing date, destination, purpose, and miles traveled.

For home office expenses, document your calculation. If you're claiming 15% of your home costs, show how you arrived at that figure.

Bank statements alone aren't enough. HMRC wants to see what you bought, not just that you spent money.

Common Expense Mistakes That Trigger Investigations

Claiming everything through your company when you're clearly inside IR35. HMRC knows what employee expense patterns look like. If you're claiming like a business while being paid like an employee, you're raising red flags.

Excessive mileage claims that don't match your working pattern. If your contract says you work on-site five days a week but you're claiming business mileage every day, that doesn't add up.

Claiming personal expenses as business costs. Your family holiday isn't a business trip because you checked email twice. Your gym membership isn't a business expense because you network there occasionally.

Claiming expenses without receipts. HMRC allows minimal evidence for some small expenses, but substantial claims need documentation.

Dealing With Mixed Status Situations

Got some contracts inside IR35 and others outside? You need to keep separate accounting for each.

Expenses related to outside IR35 contracts follow business expense rules. Expenses related to inside IR35 contracts follow employment expense rules.

General business expenses that apply to your whole operation accountancy fees, insurance, office costs are still claimable against your company profit regardless of contract status.

It's more admin, but it's essential. Mixing up the two leads to rejected claims and potential investigations.

The Tax Relief You Might Be Missing

If you're inside IR35 and not claiming the 5% allowance, you're leaving money on the table. It's automatic, requires no documentation, and reduces your deemed payment.

If you're paying employer pension contributions, make sure you're maximizing this. It's one of the most tax-efficient moves available inside IR35.

If you're working from home, claim your home office expenses properly. Most contractors either don't claim them at all or use HMRC's flat rate when actual costs would give them more relief.

When Professional Advice Pays For Itself

IR35 expense rules are complex, and the line between compliant and non-compliant can be thin. A good contractor accountant doesn't just file your accounts—they advise on what you can legitimately claim in your specific circumstances.

They'll also prepare your expense claims in a way that survives HMRC scrutiny. Proper categorization, adequate documentation, reasonable amounts—this matters.

The cost of getting expense claims wrong—rejected claims, interest charges, penalties, investigation costs—far exceeds the cost of proper accountancy advice.

Inside IR35, your expense claiming ability is severely restricted. You're largely limited to company running costs and the 5% allowance. Accept this reality and plan accordingly.

Outside IR35, you have genuine business expense flexibility, but you need to pass the wholly and exclusively test and keep proper records.

Wherever you sit on the IR35 spectrum, trying to claim expenses you're not entitled to is a false economy. HMRC has seen every trick, and the consequences of getting caught aren't worth the tax saved.

Claim what you're legitimately entitled to, document everything, and don't push boundaries that don't exist.