As a savvy entrepreneur, you know the importance of maximising your profits and minimising your tax liabilities. One way to achieve this is by claiming business expenses. However, there are a few misconceptions that need to be cleared up. First and foremost, claiming business expenses doesn’t mean you’ll get money back from some mysterious source. Instead, it involves tax relief, which helps reduce your taxable income. Secondly, not all expenses are claimable; there are specific rules and guidelines to follow.
In this comprehensive guide, we’ll walk you through the ins and outs of claiming business expenses, ensuring you stay compliant with HMRC regulations and make the most out of your deductions.
Understanding How Business Expenses Work
In essence, business expenses act as deductions from your business earnings, ultimately reducing the taxable amount – the profits. Let’s illustrate this with an example. If you charge £100 for a service but incur £10 in expenses to deliver it, your profit would be £90. Consequently, you’ll only pay tax on that £90, saving you 20% tax on the £10 spent – a substantial £2 reduction. This principle applies to all your business expenses, and the cumulative effect can lead to significant savings on your tax bill.
Distinguishing Capital Expenses from Regular Expenses
When it comes to claiming expenses, it’s essential to understand the difference between capital expenses and regular expenses. Capital expenses pertain to larger, long-term assets that your business will use over an extended period. Examples include office desks and computers, which have a useful life of at least a year. On the other hand, regular expenses, often referred to as ‘revenue’ expenses, encompass items with a shorter lifespan, like stock, paper, and printer ink.
It’s worth noting that if you’re using the cash basis of accounting, certain expenses might be treated similarly to capital expenditure. Seeking professional advice can clarify this aspect for you.
Exploring Simplified Expenses for Sole Traders and Partnerships
For sole traders or partnerships without corporate partners, simplified expenses offer an alternative approach to claiming tax relief. Instead of meticulously calculating actual costs, you can use flat rates, saving time and effort. Although this method streamlines your accounting process, remember that accurate record-keeping remains essential. You have the freedom to choose between simplified or actual expenses when claiming tax relief.
Determining Allowable Business Expenses
This is where many business owners encounter confusion and potential pitfalls. Knowing which expenses are allowable for tax relief is crucial. Engaging an accountant can be immensely helpful in this regard. HMRC also provides guidance on calculating taxable profits for Self Assessment, including a list of common allowable and disallowable business expenses.
Here are some examples of allowable business expenses:
- Business Premises: This includes rent and utility bills, but costs related to property purchases are not claimable.
- Office Costs: Expenses like phone bills, stationery, IT maintenance, and postage are eligible for tax relief.
- Travel: Fuel or mileage costs for business travel, parking fees, and transportation expenses (plane or train tickets) qualify, but general commuting costs do not.
- Staff Costs: Salaries, bonuses, pension contributions, and staff entertainment expenses are allowable. Christmas party expenses and staff gifts may also be claimed.
- Clothing: Uniforms or protective clothing used exclusively for work, and worn for safety, performance, or advertising, are claimable.
- Vehicles: The rules for vehicle expenses differ depending on ownership (limited company or personal) and calculation methods. Electric and hybrid cars have distinct considerations.
- Legal and Financial: Accountancy services, insurance policies, and solicitors’ fees fall under this category.
- Marketing and Advertising: Costs related to leaflets, printed advertisements, website maintenance, etc., are eligible for tax relief.
- Items Bought for Resale: Stock, raw materials, merchandise, etc., can be claimed as business expenses.
Claiming Business Expenses for Home-Based Businesses
If you run your business from home, you can deduct several costs as tax-deductible expenses. These may include a portion of your mortgage interest or rent, utility bills, and even mobile phone and internet usage. However, it’s crucial to claim only the proportion of these expenses directly related to your business activities.
Calculating Allowable Expenses with Precision
Calculating expenses directly tied to your business becomes more straightforward when your financial records are accurate and up-to-date. However, things can get a bit complicated if certain costs relate to both personal and business use. In such cases, you can only claim the portion that’s relevant to your business activities. For instance, if 30% of your mobile phone bill corresponds to business use, you can claim that 30% as a business expense.
Trading Allowance and Expenses
Sole traders can benefit from the Trading Allowance, which allows them to earn up to £1,000 from self-employment before registering with HMRC. If registration becomes necessary, you can still offset the allowance against your self-employed earnings. It’s important to note that you cannot claim both the Trading Allowance and tax relief on expenses simultaneously. However, you can select the more advantageous option, providing you with flexibility in optimising your tax position.
Expenses That Cannot Be Claimed
While there’s an extensive list of allowable business expenses, some costs are not claimable, including:
- Non-Work Related Travel: Expenses related to travel between home and your workplace, motoring or parking fines, and other non-business-related travel costs.
- Goods for Personal Use: Items purchased for personal use cannot be claimed.
- Premises Acquisition: Costs involved in purchasing new premises, along with legal fees connected to the purchase, are not allowable. However, structures and buildings’ capital allowances may be eligible.
- Non-Business Staff Expenses: This includes childcare, domestic help, nannies, or carers.
- Non-Work Clothing: Clothing items like jeans and trainers are not claimable.
- Customer Entertainment: Costs associated with event hospitality or entertaining customers, suppliers, and clients are not allowable.
- Training Courses: While certain training courses directly related to your business may be claimable (e.g., CPD courses), those unrelated to your business activities are not considered allowable expenses.
- Donations: Donations made to political or charitable organisations are not claimable as business expenses.
Successfully Claiming Your Allowable Business Expenses
Accurate and up-to-date financial records are your best allies when it comes to claiming tax relief on allowable business expenses. Ensuring proper entry of details in your tax return will help you maximise your deductions and reduce your tax liabilities. While HMRC usually doesn’t demand proof of expenses, it’s crucial to retain accurate records in case they ever request validation. By following the rules and guidelines outlined in this guide, you can confidently claim the expenses you’re entitled to, providing a legitimate means of optimising your tax position.