How to Make the Most of Your Business Expenses
Keeping track of expenses is one of the biggest challenges most businesses will face, regardless of size.
Just stop and think about it for a moment. Expenses cover everything from paper clips and pens to mobile phones, rent, heating, salaries... The list goes on and on, and if you're running a business you need to keep on top of it all. You will need to know what you have to account for, how you account for it and, crucially, what you are entitled to claim back. It can be a minefield. But it doesn't have to be.
Simply speaking, when you claim back expenses, any business expenditure which was paid for personally can be reimbursed by your company when you choose. Your company will also receive tax relief for any other business expenses it incurs.Before you can take a dividend, you must apply Corporation Tax on your business's profits. Your allowable business expenses then reduce the amount of profit which is liable for Corporation Tax. More allowable expenses mean less taxable profit, and your dividends will also be affected by PAYE salaries, flat rate VAT and income thresholds.
We did say it was a minefield, but here at Accountants etc. we can help you through the obstacles and save you some money.
It may seem like a statement of the obvious, but to do your expenses properly you MUST keep accurate records of everything. And don't forget that you MUST keep company records for six years after their respective financial year-end, and are still liable to incur a possible £3,000 fine during this period.
Let's take a look at some of the key areas you may or may not be able to claim as legitimate business expenses.
You will receive tax relief on the cost of anything that is essential for you to carry out your duties as a director. This covers items such as computers, printers and software. You can also claim relief towards the cost of equipping and furnishing an office, such as chairs, desks and filing cabinets. As long as personal use is negligent it will not be classed as a ‘benefit in kind’ and you will not have to pay National Insurance or income tax on it.
Company set-up fees
Initial costs incurred in running your company can be reclaimed in exactly the same way as if they were incurred now that you are trading and covers everything from printing to supplying the necessary equipment for your company. Accountancy fees or mandatory formation costs you paid can also be claimed.
Entertainment for customers and suppliers
Business entertainment is not an allowable expense and all claims for entertainment will be taxed. Your company can cover the costs but it will be added back to its profits before Corporation Tax is calculated. It may still be more financially beneficial to pay for it through your company than out of your own pocket.
You can claim for small purchases with receipts that are used exclusively in the performance of your duties. This includes the likes of postage, computer consumables and office stationery.
Christmas parties and events
Ah yes, the dreaded Christmas party, usually the source and cause of enough gossip to keep everybody going until the next one. This is an area that will be closely scrutinised by HMRC, quite simply because it is the biggest area for potential abuse by businesses. There is nothing to stop you holding a Christmas party or a summer dance for your staff as a tax-free benefit, but you will have to meet some conditions. You can invite a partner but you must not exceed expenditure of £150 per head (including VAT), and the event must cater mainly for staff. For example, expenses for one director and his or her partner is acceptable and would give you a budget of £300. However, if those attending are not mainly employees it becomes pretty difficult to argue that the main purpose of the event is to entertain staff. Note that the £150 budget remains the same for multiple events and is a collective cost.
Eyesight tests and glasses
You can claim for eye tests providing it is necessary for the initial or continued use of visual display equipment in your work. However, you may be surprised to learn that you cannot claim for glasses as they are not exclusively related to business use, unless they are prescribed during your time at work for visual display (ie, working in front of a computer screen).
A gift to an employee may be treated as a ‘benefit in kind’ and taxed accordingly, unless it is considered trivial. A gift to somebody who does not work for the company and does not consist of food, drink, tobacco or vouchers and is under £50 per year qualifies for tax relief.
Your company can provide financial support towards medical insurance for employees. Unless it is part of their one free annual check-up, it will be regarded as a benefit in kind and your company will be liable to National Insurance tax at 13.8%.
After your company has set up a contract with a pension provider it can provide payments to your pension and receive 100% tax relief as an allowable business expense. There’s a tax cap of £40,000 on how much you can contribute to a pension scheme either through your company and personally.
Claims to certain HMRC-approved professional bodies are allowed as long as they are relevant to your work. So you can forget about claiming anything back on your golf-club fees if you are a builder!
Using your home as an office
If you have to work at home - not just for conducting additional work outside of the office - you are entitled to £4 a week cover without having to report it on your P11D. When you exceed the limit, it will attract the attention of HMRC, so only make one if it’s absolutely necessary.
You will need to prove that you have a fully operational and exclusively designated work space in your home, and that you actually use it for your business. Because your house is used as both a business and personal space, it’s almost impossible to work out how much gas, electricity and insurance cover your business area consumes. You must make a genuine and proportionate estimate regarding what’s being used. A four-room house in which one room is designated to your work will normally allow you to claim a quarter of the relevant expenses, as long as a lease agreement has been arranged between you and your company for your company to rent the office from you. If you work from home and are the company’s only employee the good news is that you can claim a proportion of your council tax cost. Depending on how much you use your home for business, you may have to pay business rates rather than council tax.
A salary paid to you as an employee or as a director is an allowable expense, as are National Insurance contributions. If you fall outside IR35 legislation and have no contract of employment between yourself as the director and your company, you may choose the level of your salary. IR35 determines whether you are “employed” by your client or providing “self-employed” contracting services through your limited company. You may pay a tax-efficient salary up to the National Insurance threshold, i.e. before you become liable to start paying contributions. You will save money by paying the lower monthly salary because after you cross the threshold you will have to begin paying NICs.
Telephone and internet
If you use your home or mobile phone line for business and personal calls you cannot claim for line rental, because there is a dual purpose, but you can claim expenses for business phone calls made on that line. You could also set up a separate line in the company’s name for business purposes and charge line rental. If personal calls are made on this line the company will incur a ‘benefit in kind’ and you will be taxed accordingly. Your business can provide a mobile phone for work use, and personal calls do not need to be recorded as benefits. If your internet rental is set up in the company’s name and there is no significant personal use there are no taxable benefits. But if it is set up under your personal name you can only charge a portion of the cost to business use.
Travel and subsistence
When claiming travel as an expense remember that HMRC provides allowances only for employees who move between destinations during work, and not for those journeying to and from work. If you have previously worked under an umbrella company you may be familiar with the £5 allowance. This unreceipted, fixed allowance, does not apply when you’re working through a limited company. Instead, you must claim for your actual costs. It is an allowable expense if you are traveling to a temporary workplace; in other words, this is a place you are traveling to perform a transient task or for a limited duration.
You can claim for training aimed at improving your current skills which you use in your work. You can also claim travel and accommodation. HMRC are not keen on courses such as MBAs because they offer new skills rather than building on existing ones.
You can claim relief on the full cost of your company’s accountancy fees, providing their professional time is spent working on your company’s accounts and not your personal accounts. If they provide paid advice or time on your personal accounts this will be taxable and will be recorded as a ‘benefit in kind’.
Business travel accommodation
Full tax relief can be claimed on accommodation used when traveling for business-related purposes, providing the expense is reasonable, so steer clear of five-star hotels. Lunch is reclaimable while on business travel if you exceed five working hours, and this extends to dinner if you are working for 10 hours.
If you use your personal vehicle for business travel you can claim mileage. Planes, trains and ferries can also be covered under business mileage. Tolls, congestion charges and parking fees are all allowable expenses. Ensure that you keep receipts of everything and a mileage log. Also take into consideration that HMRC are hesitant towards accepting excessive use of taxis.
Claiming limited company expenses
Your company’s expenses can be paid from the company account or as a ‘reimbursed expense’ when paid for out of your own pocket. With regards to reimbursed expenses, directors are able to refund themselves from the company account, but must keep receipts. You can only claim within HMRC’s parameters, which define allowable expenses as being ‘wholly and exclusively’ incurred in the performance of your duties. When there’s a dual purpose to your claim it’s unlikely to be accepted, because the expense would be needed regardless of the business, for instance, clothes. If the dual purpose is only incidental because of a business necessity the claim may still be valid, such as protective work clothes or uniforms that could also be used for personal use.
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