Guide to tax-deductible business expenses.
This article was written by Jo Nockels, Training and Communications Manager of TaxAssist Accountants, the UK’s largest network providing tax and accountancy advice and services specifically for small businesses.
All business owners want their business to turn a profit. However, they also want to be sure that the accounts accurately reflect not only the income, but the expenses too. Claiming the correct expenses will mean that your profits are accurate and therefore, your tax bill is no more than you are legally obliged to pay. However, knowing what to and what-not-to claim can be tricky.
Use of home
If you work from home, you will be able to put through a portion of the running costs of your home. This could cover household bills such as light and heat, telephone, broadband/ISP, rent, council tax, mortgage interest, insurance, purchases of and repairs to business equipment, cleaning and some redecoration/repairs of the premises. But there are some pitfalls to be particularly careful of.
Firstly, if for instance you claim that an entire room in the house is dedicated to the business, you could jeopardise your entitlement to Only or Main Residence Relief - which usually ensures that any profit on the sale of your main personal residence is tax-free.
Secondly, make sure that when the designated area is being used for business purposes, it is used only for that purpose. So make sure the kids aren’t in the room at the same time!
Motor expenses
If you use your car to make business trips (say to suppliers or customers, but excluding normal commuting), you can claim mileage expenses at a rate of 45p per mile for the first 10,000 and 25p per mile thereafter.
Alternatively, you could transfer (see below) the car into the business and then not only claim relief for the value of the car itself, but also for all of the running costs. However, they will be restricted to reflect any private use and if you’re operating via a company, it is probably more tax efficient and less burdensome to stick to claiming mileage.
Pre-trading expenses
Keep receipts of any business expenses you incur prior to the business starting to trade, as you should be able to get tax relief for these.
Keep receipts of any business expenses you incur prior to the business starting to trade, as you should be able to get tax relief for these.
If you’re VAT registered, you could also reclaim VAT on goods purchased up to four years before you became VAT registered and six months for services, but there are some conditions to satisfy.
Training
The legislation regarding the tax treatment of training always surprises people. If the business pays for the training of the proprietor (whether in a sole trade or partnership), and the training is for a new skill, the costs will generally not be tax deductible.
If the training was to keep their skills up-to-date, then the costs would probably be allowable, including any other associated costs such as travel and accommodation.
Whether trading as a company, sole trade or partnership, business-related training for employees will normally be tax deductible for the business. As a director is also an employee of a company, this includes them too.
If the business is VAT registered, the VAT treatment will be determined by whether the training is business or non-business related.
Transferring assets to the trade
You can get tax relief for assets you bought personally but subsequently transferred into the trade, even if it was purchased prior to the trade starting or was originally purchased for personal use. Again, the relief will be restricted for any personal use though.
Family
If your partner or members of your family are genuinely assisting in the business, you could pay them a wage. Whilst there may be tax savings for you and the business, this could trigger tax implications for your partner/relation, and national insurance implications for both the business and them. And just to labour the point, they must actually do some work for the business and it must be at a reasonable rate.
If you want to get your children involved, be careful of the rules regarding what hours they can work and the National Minimum Wage applicable to them.
Record keeping
Firstly, make sure you retain all of your receipts. This will ensure you claim everything you are entitled to and is also a HMRC requirement - and particularly important if you are VAT registered.
And secondly, it is imperative you accurately record your transactions. Not only will this hopefully ensure you claim everything you are entitled and keep a tight handle on your business, but it is also a HMRC requirement and severe cases can lead to fines.
Submit paperwork on time
Registering for self-employment late, submitting returns late or making payments late are just a few of the events that can lead to penalties and interest. So ensure you are well prepared and are aware of the deadlines you need to meet. Penalties are not allowable for tax, so they are expensive and you receive no tax relief for them either.
Business entertainment and gifts
One cannot touch on entertainment and gifts, without stressing that this is a complex area of tax, with regards to VAT, benefits in kind and tax deductibility.
With regards to entertainment, generally-speaking if non-employees are being entertained (suppliers, customers, potential customers etc), then the costs are not allowable for tax and the VAT treatment follows suit. If a mixture of employees and non-employees attend, then the costs are apportioned. But just be careful if your employees are acting as ‘hosts’ to the other non-employee guests. In this scenario, all of the expenses would be disallowed for tax purposes along with the VAT.
Most gifts and the VAT you incur on buying them are not allowable for tax purposes.
Most gifts and the VAT you incur on buying them are not allowable for tax purposes. However, certain ‘small gifts’ can be. The criteria for the expenses to qualify as small are as follows:
- The gift is not food, drink or tobacco, nor is it a token or voucher exchangeable for goods.
- The cost of the gift (together with the cost of any other such gifts to the same recipient in the relevant tax period) does not exceed £50.
Summary
All of the areas considered in this article require close attention. You could be missing the opportunity to claim the expenses you are entitled to or risk getting in trouble with HM Revenue & Customs for claiming disallowed items. Therefore, it is best practice to seek professional advice from an accountant.
If you enter a dispute with the taxman, we have a few handy tips to help you navigate the process.
