Self-Employed Expenses UK Guide for Employers

Self-employed expenses affect how contractors price their work, structure their invoices and manage tax efficiency. For employers and HR professionals, understanding these rules is not about advising contractors on tax but about managing commercial risk, ensuring compliance with employment status tests and structuring relationships with self-employed individuals correctly. Employers who fail to recognise how expenses work for the self-employed may unintentionally undermine a contractor’s status, create exposure under IR35 or the agency rules in section 44 ITEPA, or commit to unfavourable commercial terms.

What this article is about
This article provides a detailed and employer-focused analysis of self-employed expenses in the UK. It explains what expenses contractors can claim in principle, how employers should approach expense reimbursement, the impact of expenses on employment status assessments (including IR35 and off-payroll working) and the steps HR and business owners should take when dealing with self-employed individuals. The aim is to give employers clarity on compliance obligations and to support robust, commercially sound contractor management. It does not provide tax advice to contractors, and employers should not tell contractors which specific items HMRC will or will not allow as deductible expenses.

Self-employed expense rules are set primarily by HMRC. A contractor can generally only claim an expense that is wholly and exclusively for the business. Where a cost has both a business and personal element, HMRC will normally disallow it unless the business element can be clearly and objectively separated and apportioned, for example an identifiable business share of phone or broadband costs. Certain categories attract specific restrictions, such as travel (including limits on ordinary commuting), subsistence, capital expenditure and home-working costs. While these rules sit on the contractor’s side, they play a significant role in how contractor relationships operate in practice, from pricing to invoice structures.

For employers, the key issue is ensuring that working arrangements do not resemble employment or worker status in practice. Expense handling is one of the areas where blurred boundaries often arise. When an employer pays for travel, equipment or subsistence in a way that mirrors employee treatment, the contractor’s self-employed status can be challenged. Where a contractor works through a personal service company (PSC), IR35 and the off-payroll working rules add a further layer of complexity. Sole traders are outside the IR35 regime, but the way their expenses are handled can still be relevant to wider employment status assessments and to the application of the agency rules.

This article explores the legal and practical considerations for employers in depth, addressing both the technical rules on expenses and the broader HR implications. Each section concludes with a summary to reinforce key points and support internal compliance processes, helping HR and business owners to design internal policies, contract terms and working practices that remain defensible if reviewed by HMRC or challenged by contractors.

Section A: Understanding self-employed expenses

Self-employed expenses form a core part of how contractors manage their business costs and set their commercial rates. Although expense rules apply to the contractor rather than the hiring organisation, employers benefit from understanding how allowable and non-allowable costs work. This understanding helps ensure clarity on pricing, supports more accurate budgeting and reduces the risk that employer actions inadvertently affect the contractor’s tax position or employment status. It also helps HR and business owners recognise when expense practices may be edging towards employment or worker-style arrangements.

1. What self-employed expenses are

Self-employed expenses are business costs that individuals deduct when calculating taxable profit. HMRC requires that these expenses be incurred “wholly and exclusively” for business purposes. The test is strict: if an expense has both a personal and business purpose, it will generally be disallowed unless the business element can be clearly and objectively separated and apportioned. A common example is apportioning part of a mobile phone or broadband bill to business use, based on reasonable and supportable assumptions.

For the self-employed, there is also a distinction between revenue expenditure and capital expenditure. Revenue expenses relate to the day-to-day running of the business, while capital expenditure relates to longer-term assets such as computers or machinery, which may qualify for capital allowances instead of simple deduction. Unlike employees, self-employed individuals work without PAYE oversight, so expenses directly shape their taxable income and therefore the cost of supplying services.

For employers, understanding these principles helps explain why contractors structure invoices in particular ways, including itemising costs, adding VAT where applicable and setting daily or hourly rates that factor in unrecoverable expenses. However, employers must remember they are not responsible for deciding whether a particular cost is “allowable” for tax; that decision sits with the contractor and their professional advisers.

2. Types of allowable expenses

Allowable self-employed expenses commonly fall into recognised categories, including:

• Travel that is wholly for business purposes and not ordinary commuting to a permanent base
• Subsistence costs incurred during business journeys, based on actual costs rather than employee-style scale rates
• Home-working expenses, covering an apportioned share of utilities, rent and internet
• Equipment and tools used for the business, including some items that may fall under capital allowances
• Capital allowances for larger purchases such as computers or machinery
• Training and professional development relevant to the contractor’s existing trade
• Professional fees, including accountancy costs, regulatory fees and insurance premiums

Business travel and subsistence are areas where employers often see expenses appear on contractor invoices. For self-employed individuals, travel to a client’s site or to a temporary place of work can often be allowable, whereas travel that is effectively commuting to a permanent base is not. For contractors operating via PSCs, additional restrictions apply under IR35, including rules around travel to a deemed permanent workplace and the 24-month rule for temporary workplaces, but sole traders remain outside the IR35 regime.

These categories do not grant employers any right to audit the contractor’s tax affairs or to guarantee how HMRC will treat specific items. However, they provide a framework for understanding why contractors may include certain cost items within invoices or require reimbursement under commercial terms, and why they may be resistant to arrangements that leave them unable to claim costs that are fundamental to their business model.

3. Non-allowable expenses

General living costs, client entertainment, personal travel and ordinary clothing are typically disallowed unless they fall into narrow exceptions. For example, clothing qualifies only when it is protective or forms part of a recognisable uniform required for the trade. Entertaining clients is generally non-deductible for tax purposes even where there is a clear business rationale.

The distinction between allowable and non-allowable expenses matters because employers should not encourage arrangements that appear to subsidise non-business or dual-purpose expenses, which could create records suggesting disguised employment or generate disputes about recoverability. Where a contractor seeks reimbursement for items that appear personal or only loosely connected to the contracted services, employers should treat the issue as a commercial negotiation rather than a discussion about tax relief.

4. Why employers need to understand them

Employer awareness of expense rules supports better contractor management and more defensible employment status decisions. When employers understand allowable costs and the “wholly and exclusively” principle, they are less likely to agree inappropriate reimbursements, create confusion about status or inadvertently replicate employment-style arrangements. Expense handling is one of the factual indicators HMRC or a tribunal may consider when reviewing whether a contractor is genuinely in business on their own account.

In addition, knowledge of expense categories helps employers structure contracts that properly allocate cost responsibility and evidence requirements without overstepping into managing the contractor’s tax affairs. Employers can require clear invoicing, supporting documentation and appropriate VAT treatment, while making it explicit that the contractor is responsible for compliance with HMRC rules. Where expenses are recharged, employers should also recognise that reimbursed amounts will usually be subject to VAT where the contractor is VAT-registered, unless the strict conditions for a disbursement are met, which is relatively uncommon in practice.

Section A Summary

Self-employed expenses are business costs that contractors deduct to calculate taxable profit under HMRC’s “wholly and exclusively” test. While employers do not administer these rules and should not advise contractors on detailed tax deductibility, they must recognise how the expense categories work to avoid blurring employment status lines or creating misaligned commercial expectations. A basic understanding of what is and is not generally allowable supports clearer negotiations, safer contractor engagements and more robust status assessments.

Section B: Employer responsibilities when engaging the self-employed

When hiring self-employed contractors, employers must manage expenses in a way that supports the commercial relationship without creating obligations or behaviours that resemble employment. This requires a balanced approach: applying reasonable controls to protect the business while ensuring contractors remain responsible for their own tax affairs, working practices and business risks. Employers should ensure that expense handling aligns with genuine business-to-business arrangements and does not undermine employment status assessments, including IR35 for PSC contractors and the agency rules for certain agency-supplied individuals.

1. Expense reimbursement and invoicing

Self-employed contractors usually recover expenses by including them on an invoice. Employers should avoid reimbursing expenses directly in the same way they would for employees. Instead, expenses should be:

• pre-agreed in the contract
• limited to specific categories associated with delivering the service
• supported by evidence where appropriate
• itemised clearly on invoices

Reimbursements should pass through normal accounts-payable procedures and never through payroll. If an employer pays expenses via payroll or provides allowances similar to staff benefits, the arrangement can undermine the contractor’s independence and weaken arguments against worker or employee status. It may also provide HMRC with evidence of control or integration during IR35 or agency-rules enquiries.

Where contractors are VAT-registered, employers should expect VAT to be charged on reimbursed expenses unless the contractor is passing through a cost that qualifies as a disbursement under VAT rules. Disbursements have strict criteria and most contractor expenses will not meet them; VAT treatment should be checked in cases of doubt.

2. Distinguishing contractors from workers and employees

Expense practices can be a significant indicator of employment status. Employers who routinely reimburse travel, subsistence or equipment costs as though the contractor were an employee risk creating the impression that the individual is integrated into the business. This may strengthen arguments that the contractor is a worker or employee and can also support HMRC claims relating to disguised employment.

Employers should ensure that contractors:

• provide their own equipment unless commercially impractical or where safety-critical equipment must be supplied by the end client
• invoice for costs rather than claim staff-style expenses
• bear the financial risk of running their business
• decide how work is completed, without employer control over methods

Maintaining these indicators safeguards the legitimacy of the contractor relationship. In addition to control and substitution, employers must also consider mutuality of obligation, a key employment-status test. Expense patterns that suggest ongoing obligations or employer-like support can weaken arguments that a contractor is genuinely in business on their own account.

3. Commercial terms and contract clauses

Contracts with self-employed individuals should include clauses covering:

• which expenses are reimbursable
• evidence requirements
• VAT treatment
• payment timelines
• limitations on travel costs or daily subsistence
• responsibilities for tools and equipment

Most contractor agreements also include an indemnity clause requiring the contractor to indemnify the employer for any tax, penalties or interest arising from the contractor’s failure to comply with HMRC rules or from HMRC challenging the contractor’s status. These clauses help protect the organisation from financial exposure where contractor tax affairs have not been managed correctly.

The agreement should also make clear that the contractor is solely responsible for determining whether an expense is allowable for tax purposes. Employers must avoid drafting clauses that resemble employee policies, such as subsistence allowances or blanket daily rates for meals, as these can weaken the position that the contractor operates independently and may be used as evidence of disguised employment.

4. Data protection and record-keeping

Employers must retain invoices and supporting documentation in line with accounting and GDPR requirements. Receipt images and supporting documents count as personal data where they include identifiable information. Employers must ensure:

• secure storage
• access controls
• retention for at least six years in line with Companies Act and HMRC rules
• clear deletion protocols once the retention period ends

Good record-keeping supports financial accuracy and provides evidence that expenses are handled on a commercial rather than employment-style basis. It also ensures the business is prepared if HMRC reviews contractor relationships or if disputes arise about the nature of the engagement.

Section B Summary

Employers are not responsible for policing the tax rules governing self-employed expenses, but they must approach reimbursements and invoicing in a way that protects the contractor’s status and the organisation’s compliance position. Clear contract clauses, proper invoicing, appropriate VAT treatment and sound record-keeping help prevent misclassification risks and maintain clean commercial relationships.

Section C: Self-employed expenses and IR35 / employment status

Expenses play a significant role in employment-status assessments, including IR35, the off-payroll working rules and the agency legislation under section 44 ITEPA. Employers engaging contractors must understand how certain expense practices can wrongly signal employment, blur financial-risk indicators or create patterns inconsistent with genuine self-employment. This section examines how expenses intersect with status tests and what employers can do to mitigate risk while maintaining clear, commercial business-to-business arrangements.

1. How expenses interact with employment status tests

Employment-status tests consider the overall reality of the working relationship, focusing on factors such as control, substitution and mutuality of obligation. Financial risk is also a core indicator. The way expenses are handled can therefore influence the outcome.

If contractors bear their own business costs, source their own equipment and price their services to absorb unrecoverable expenses, this supports self-employment. Conversely, if the employer routinely covers business expenses in the same manner as employees, provides equipment and pays allowances, this can contribute to a picture of dependency or integration. These practices can weaken the argument that the contractor is genuinely in business on their own account.

2. IR35 and off-payroll working

Contractors operating through a personal service company fall within the scope of IR35 and the off-payroll working rules. Sole traders are not subject to IR35, although expense handling may still inform wider employment status reviews. When the end client is responsible for determining IR35 status, it must take reasonable care in that assessment. Expense arrangements are among the indicators HMRC reviews when questioning whether a contractor resembles an employee.

For PSC contractors deemed “inside IR35”, certain expenses such as ordinary commuting become non-deductible. PSCs cannot deduct travel to what is considered the contractor’s permanent workplace under IR35 rules, and the 24-month rule for temporary workplaces may apply. Reimbursed expenses must satisfy strict business-purpose criteria under both tax law and the commercial terms agreed with the client. Employers who replicate employee-style expense arrangements risk creating evidence that supports an “inside IR35” determination, which may increase tax exposure under the off-payroll rules.

3. Red flags for disguised employment

Particular expense patterns can suggest disguised employment, including:

• paying daily subsistence allowances
• reimbursing home-to-work travel or other ordinary commuting
• providing equipment that contractors would normally supply themselves, except where safety-critical
• covering training or professional-subscription costs relevant to the contractor’s own trade
• providing accommodation, travel cards or mileage allowances identical to employees

These red flags weaken the contractor’s financial-risk profile and may lead HMRC to question whether the contractor is truly independent. They may also support claims that mutuality of obligation exists, especially where expense arrangements imply ongoing commitments or obligations more consistent with employment.

4. Risk mitigation steps for HR and business owners

To maintain compliance and avoid IR35 exposure, employers should:

• ensure contractors provide their own equipment unless commercially impractical or safety-critical
• avoid staff-style allowances or benefits
• require contractors to invoice for agreed expenses rather than claim through employee systems
• maintain contracts that reflect genuine business-to-business terms, supported by working practices
• periodically review arrangements to ensure they still reflect the actual working relationship

These measures help maintain employment-status integrity and strengthen the employer’s defence in the event of HMRC enquiries, tribunal claims or disputes with contractors. Employers engaging PSC contractors via agencies must also consider section 44 ITEPA, as certain arrangements may cause an individual to be treated as an employee for tax purposes if supervision, direction or control is present.

Section C Summary

Expense practices can strongly influence employment-status outcomes. Employers must avoid replicating employee expense arrangements and ensure contractors operate in a manner consistent with genuine self-employment. Proper controls reduce IR35 and agency-rules risk, helping end clients maintain defensible and compliant contractor arrangements.

Section D: Practical employer processes

Employers need structured internal processes to manage contractor expenses without undermining self-employed status or introducing unnecessary administrative burdens. The objective is to preserve clear commercial boundaries, support compliance with employment-status rules and maintain accurate financial controls. Well-designed processes also help demonstrate that the contractor relationship reflects genuine business-to-business terms rather than employment or worker status.

1. Setting internal policies for contractor expenses

Although contractors should not be subject to employee policies, employers benefit from maintaining internal guidance on how contractor expenses are handled. Internal rules can cover:

• which expense types the organisation may reimburse
• the level of evidential support contractors must provide
• whether VAT should be included on reimbursed amounts
• how expenses interact with agreed service rates
• caps or limitations for specific categories such as mileage or accommodation

The focus should remain commercial, not employment-style. Internal guidance should avoid language that resembles staff entitlements or allowances. Instead, it should reinforce that the contractor retains responsibility for pricing their services to absorb ordinary business costs, and that the organisation will reimburse only those items necessary for delivery of the contracted service.

2. Verifying business purpose

Employers must confirm that any reimbursed expense has a clear and legitimate business purpose. Verification should not mirror employee oversight or impose excessive control over contractor activities. Instead, it should be proportionate and consistent with commercial practice.

Appropriate verification measures include:

• checking that receipts or invoices correspond to the relevant work or deliverable
• confirming that the cost falls within the contractually agreed categories
• verifying that the expense is commercially reasonable and necessary for the service

Employers should not instruct contractors on how travel should be booked, which suppliers to use or how equipment should be operated, as this may indicate control and undermine self-employment. Verification should focus strictly on ensuring the organisation is not paying for personal or non-contractual expenditure.

3. Managing disputes and rejected expenses

Disputed or rejected contractor expenses should be handled as commercial matters rather than HR issues. Where a contractor submits costs outside the agreed categories or without adequate evidence, the employer may seek clarification, request alternative proof or reject the item entirely. The tone should remain contractual, not managerial.

Where disagreements escalate, the contract should govern resolution. Employers may rely on:

• the schedule of reimbursable expenses
• notice and variation provisions
• termination clauses where failure to comply constitutes breach

Maintaining clear boundaries ensures that disputes are treated as breaches of commercial terms rather than implying any employment-type rights or entitlements.

4. Working with accountants and legal advisers

Where contractor arrangements involve high values, international travel, accommodation or ambiguous expense categories, employers may benefit from specialist advice. Accountants can help ensure VAT treatment and invoicing practices align with statutory requirements. Legal advisers can review contracts and working practices to ensure expense clauses reinforce genuine self-employment and do not imply employment or worker status.

For PSC contractors, expert review of IR35 assessments may also be necessary. Employers must ensure the written assessment matches real working practices; expense handling is one of the areas HMRC may reference when challenging the accuracy of an IR35 status determination.

Section D Summary

Structured, commercially focused processes help employers manage contractor expenses effectively while maintaining clear boundaries. Appropriate verification, consistent internal procedures, well-drafted contracts and timely professional advice all contribute to a defensible and compliant contractor-engagement framework. These measures protect the organisation’s financial integrity and support robust employment-status decisions.

FAQs

Can an employer reimburse self-employed contractor expenses without affecting status?

Yes, provided reimbursements are commercial, linked to the delivery of the contracted service and processed through invoicing rather than payroll. Employers should avoid employee-style allowances such as flat-rate subsistence or travel benefits, as these may suggest integration or disguised employment. Reimbursement must always be based on actual costs rather than HMRC scale rates, which apply only to employees.

Can self-employed contractors claim mileage and subsistence?

Self-employed contractors can claim mileage and subsistence where the costs are wholly and exclusively for business purposes. Mileage for travel to a temporary client site may be allowable, but travel to a permanent workplace usually constitutes ordinary commuting and is not deductible. Subsistence must be based on actual expenditure, as self-employed individuals cannot use employee-style flat-rate allowances. PSC contractors may face additional restrictions if deemed inside IR35.

What documentation should employers ask for?

Employers should ask contractors to provide evidence of costs such as itemised receipts or supplier invoices. Documentation requirements should be proportionate and commercially reasonable, ensuring that the employer can confirm business purpose without exercising employee-level control. Employers must not advise contractors on what HMRC will or will not allow as deductible, as this responsibility sits with the contractor and their advisers.

Do reimbursed expenses attract VAT on contractor invoices?

Where a contractor is VAT-registered, reimbursed expenses generally attract VAT unless they qualify as disbursements under strict VAT rules. Most contractor expenses do not meet the criteria for disbursements because the contractor usually contracts for and consumes the goods or services themselves. Employers should review invoices for consistency and query unusual VAT treatment via usual accounts-payable channels.

How do expenses differ for PSC contractors under IR35?

If a PSC contractor is assessed as inside IR35, certain expenses such as ordinary commuting become non-deductible. Travel to what is considered a permanent workplace under IR35 rules cannot be claimed, and the 24-month temporary workplace rule may apply to restrict allowable travel. Employers must take reasonable care in their IR35 status assessments, and employee-style expense arrangements can influence the outcome. Sole traders remain outside IR35 but may still be impacted by general employment-status considerations and the agency rules.

Section FAQs Summary

The FAQs reinforce key compliance principles around reimbursement, documentation, VAT, IR35 and the limits of what employers should advise on. Employers should handle contractor expenses through commercial invoicing, avoid employee-style practices and ensure contractors remain responsible for their own tax decisions.

Conclusion

Self-employed expenses sit at the intersection of commercial practice, tax rules and employment-status assessments. While contractors are responsible for determining which costs are allowable for tax, employers must understand how expense arrangements influence the wider compliance landscape. The way expenses are handled can support or undermine the independence of a contractor, affect IR35 determinations for PSCs, trigger agency-rule considerations and shape the commercial certainty of the relationship.

Employers and HR professionals should implement robust, commercially grounded processes that protect the organisation’s legal and financial position while respecting the contractor’s autonomy. Well-drafted contracts, proportionate verification, accurate VAT handling and appropriate record-keeping all support defensible contractor arrangements. When handled correctly, expense management becomes a key component of managing compliant, efficient and sustainable business-to-business relationships.

Organisations working with contractors at scale or in high-risk environments should consider periodic reviews of working practices to ensure consistency with contractual terms. Professional advice may be appropriate where IR35, complex VAT issues or unusual expense categories arise.

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