Inside IR35? Extremely Limited Relief
Here's where it gets painful. If you're caught inside IR35, you're treated as a deemed employee for tax purposes. This means your expense claims become severely restricted.
The 5% Allowance
When working through your own limited company but caught inside IR35, you get a flat 5% expense allowance. That's it. This is meant to cover your additional costs of running a business, but it rarely comes close to your actual expenses. The 5% applies to your gross contract income before you extract salary or dividends. On a £500 per day contract (roughly £120,000 annually), that's £6,000 in relief. Compared to the £15,000 to £25,000 in genuine expenses many contractors incur, you can see the problem.
What the 5% Covers
HMRC intends this blanket allowance to cover:
- Accountancy costs
- Professional subscriptions
- Insurance
- Administrative expenses
- Other overheads
You don't need receipts for this allowance. It's automatic. But you also can't claim more than 5% even if your actual costs exceed it.
What You Definitely Cannot Claim Inside IR35
The restrictions mirror those of permanent employees:
- Travel between home and the client site (treated as ordinary commuting)
- Subsistence and meals during the working day
- Office equipment and computers
- Training and professional development (with limited exceptions)
- Business mileage to and from the contract location
The logic is brutal but simple: if HMRC treats you as an employee for tax purposes, you get employee expense rules. Employees cannot claim commuting costs or routine equipment, so neither can you.
The Supervision, Direction or Control Exception
There's one potential relief valve. If you can demonstrate that you're not subject to (or to the right of) supervision, direction or control in how you perform your services, you may be able to claim travel and subsistence expenses even when inside IR35. This is a high bar to meet. The client must have no control over how you work, only what you deliver. In practice, most inside IR35 contractors cannot satisfy this test because the client inevitably directs working methods to some degree.
Agency Contracts and Fee-Based PAYE
If you're working through an agency that operates fee-based PAYE, your situation differs again. You're an employee of the agency for tax purposes, which means:
- No limited company expenses at all
- Standard employee expense rules apply
- You might claim professional subscriptions or tools required for the job
- Travel and subsistence generally not allowable
Some agencies offer slightly better treatment through salary sacrifice or other arrangements, but these have been largely closed down by recent legislation.
Umbrella Companies
Umbrella companies deserve special mention because they're common and the expense position is particularly poor. When you work through an umbrella:
- You're an employee of the umbrella company
- Normal employee expense rules apply
- You cannot claim travel between home and the workplace
- You cannot claim subsistence
- You may be able to claim professional subscriptions if they're mandatory
Some umbrella companies claim you can reclaim travel expenses. Be very cautious. HMRC has been cracking down on umbrellas making false promises about expense claims. If it sounds too good to be true, it probably is.
Keeping Records
Whichever situation applies to you, proper record keeping matters.
Keep evidence of:
- All receipts and invoices
- Mileage logs with dates, destinations and purposes
- Bank and credit card statements
- Contracts and engagement terms
- Working pattern records
HMRC can investigate up to six years back (longer if they suspect fraud). Digital records are fine, but make sure they're backed up and organised.
Getting It Right
The difference between inside and outside IR35 on expenses alone can be worth £10,000 to £20,000 per year. That's precisely why getting your IR35 status right matters so much.
If you're operating outside IR35, claim everything legitimately allowable. Keep good records and don't be shy about deducting genuine business expenses. That's not tax avoidance, it's how business taxation works.
If you're inside IR35, accept the limitations and factor them into your rate negotiations. The loss of expense relief is a real cost that should be reflected in what you charge.
Outside IR35 gives you full expense freedom for legitimate business costs. Inside IR35 restricts you to a 5% flat allowance that rarely covers your actual expenses. Know which side of the line you're on and claim accordingly.
