Expenses Claimable Through a Personal Service Company (PSC)

This is a nuanced area. The expenses you can claim depend on whether the IR35 (intermediaries) legislation applies to your engagement. Here is a structured overview:

What the Law Says

The IR35 Deemed Payment Calculation (where IR35 applies)

Under s.54(1) ITEPA 2003, the deemed employment payment is calculated through a series of steps that allow the following deductions:

1. 5% flat-rate allowance (Step 1): The gross receipts from relevant engagements are automatically reduced by 5% to cover general business expenses of the intermediary.

2. Employment-type expenses (Step 3): A deduction is allowed for expenses met by the intermediary that would have been deductible from taxable earnings if the worker had been directly employed by the client and had paid those expenses themselves. This is tested against the normal employment income rules in Chapters 1–5 of Part 5 ITEPA 2003.

3. Capital allowances (Step 4): Deductions are allowed for capital allowances on expenditure incurred by the intermediary that could have been deducted from employment income under s.262 CAA 2001 if the worker had been employed by the client.

4. Pension contributions (Step 5): Contributions made by the intermediary to a registered pension scheme for the benefit of the worker are deductible, provided they would not be chargeable to income tax as the employee's income if made by an employer.

5. Employer's NICs (Step 6): The amount of employer's National Insurance contributions paid by the intermediary in respect of the worker is deductible.

6. Mileage allowance relief (Step 3 extension): The deductible expenses also include mileage allowance relief the worker would have been entitled to in respect of a vehicle, on the assumption the worker was employed by the client and the vehicle was not a company vehicle.

Travel Expenses — Restriction from April 2016

From 6 April 2016, s.339A ITEPA 2003 restricts travel and subsistence relief for workers providing services through employment intermediaries (including PSCs). Each engagement is treated as a separate employment, meaning ordinary home-to-work travel and associated subsistence (meals, accommodation) generally cannot be claimed.

HMRC Guidance / Practice

The "Employment Test" for Step 3 Expenses

HMRC emphasises that the normal employment income rules are very rigorous when determining what qualifies under Step 3. Many expenses met by the intermediary will not satisfy them. For example, wages paid to a spouse for administrative work are unlikely to qualify, as they would not have been allowable against emoluments from a specific client contract.

Travel to Client Premises (Pre-April 2016 / Temporary Workplaces)

Before the 2016 restrictions, HMRC confirmed (via the Paymaster General's statement during the Finance Bill debate on IR35) that a worker continuously employed by their service company undertaking contracts at different client locations can claim travel costs to those clients' premises, provided the client's premises qualify as a temporary workplace (i.e., the worker does not expect to work there for more than 40% of the time over a period exceeding 24 months). However, this is now significantly curtailed by the post-April 2016 rules above.

Expenses Reimbursed by the Intermediary

From 6 April 2002, expenses originally met by the worker and then reimbursed by the intermediary are treated as expenses met by the intermediary for Step 3 purposes.

Types of Expenses Commonly Received

HMRC notes that workers operating through a service company (including a PSC) may receive expenses and/or benefits for accommodation or subsistence, and temporary workers may receive amounts for travel to a temporary workplace. Detailed guidance is found in HMRC's Employment Income Manual and at ESM2051.

Summary Table

⚠️ Important caveat: Whether IR35 applies at all to your engagement is a separate (and critical) question. If IR35 does not apply, the PSC is taxed as an ordinary company and normal corporation tax rules on deductible business expenses apply instead. You should also check whether the off-payroll working rules (for public sector or medium/large private sector clients) apply, as these shift the compliance obligation away from the PSC.