How to claim software expenses as an IT contractor

If you’re a limited company IT contractor, most software costs can be offset against your company’s profits to reduce its Corporation Tax bill.

This includes everything from development tools and cloud platforms to security software and accountancy systems.

Although most software expenses are very straightforward, there are a few areas where you should take particular care, for example, when there is mixed personal and business use.

In this article, Michael McCullion, MD of Bright Ideas Accountancy, explains more.

The fundamental rule for expense claims

The golden rule for all types of business expenses is that the cost must be incurred wholly and exclusively for the purposes of your trade.

The method of payment you use isn’t relevant – whether you purchased the software personally and reclaimed it, or your company paid directly.

What matters is that the cost relates directly to your contracting activities.

Find out more in our complete guide to allowable IT contractor expenses.

Typical software costs you can claim

Most contractors incur a range of software costs in their day-to-day work, including:

• Development tools and IDEs
• Version control platforms (e.g. GitHub, GitLab)
• Cloud services (AWS, Azure, Google Cloud)
• Security software such as VPNs and antivirus software
• Project management and collaboration tools
• Accounting and invoicing software
• Testing tools and environments

Where any of these are used for your contracting work (and these examples clearly will be), the cost is normally allowable.

Most software is now sold on a monthly or annual subscription basis, and there is rarely anything complex to consider.

Cloud services and usage-based costs

Cloud platforms account for a significant portion of many contractors’ costs.

Charges for hosting, storage, and compute services are typically billed based on usage and treated the same way as other software subscriptions.

If the services are used for client work, the cost is normally allowable.

If you also run personal projects on the same account, you may need to exclude the non-business element from your claim.

Software with mixed personal use

Many contractors use the same software for both work and personal tasks. Common examples include Microsoft 365, cloud storage services (OneDrive, Google Drive, Dropbox) with mixed file types, and general productivity tools.

If personal use is only incidental, it may be overcautious to split the cost.

In cases where there is more than incidental personal use, only the business proportion of the cost is allowable for Corporation Tax.

There is no fixed formula to work out a reasonable and consistent split, but it is usually based on usage, storage, or time spent on business work. Keep a brief note of any methods and calculations you use.

If you have any doubts over any potentially dual-purpose expenses, always check with your accountant.

One-off software purchases

What about software you purchase outright, not on a subscription basis?

In most cases, this is still treated as a business cost as long as it relates to your contracting work.

Where the cost is high, or the software forms part of a wider system used over a number of years, it may fall within the capital allowances rules rather than being treated as a simple expense.

In practice, this distinction rarely affects your overall tax position, as relief is often available in full in the year of purchase.

If you are unsure about the tax treatment of a particular expense, it is worth checking with your accountant.

Bundled software and hardware

Software is sometimes included when you buy a new laptop, PC or server.

Where the software element is insignificant, it is often treated as part of the overall cost.

If the software forms a significant part of the purchase, it may be appropriate to separate it out for accounting purposes, particularly if the hardware is being treated under capital allowances.

This is more relevant where bundled licences, operating systems, or specialist tools make up a meaningful part of the overall price.

Record-keeping

As is true with all of accounting transactions, you need to keep records of all software expenditure, including:

• Invoices and receipts
• Subscription confirmations
• Payment records

When you pay regular subscriptions, make sure they are clearly identifiable in your bank feed or accounting software, rather than grouped together or miscoded.

If you are reclaiming costs paid personally, keep a clear audit trail showing the original purchase and the reimbursement from your company.

This is made infinitely easier thanks to popular accounting software such as FreeAgent and Xero.