Managing Business Expenses
Having an effective way of managing your expenses will help you to keep control of your expenditure in the simplest of ways.
What are business expenses?
A business expense is an expense paid by either of the following: the business, a director or an employee and is either physical items or services needed to run the business. HMRC make it very clear what constitutes a business expense; an expense that is necessary and is needed as a part of running your business on a day-to-day basis. HMRC have two categories when looking at how they view the expenses and they are recorded differently in year-end accounts and tax returns. The two categories are:
- Tax deductible – the majority of expenses fall into this category. These include expenses such as business-related travel, IT equipment and services like accountancy and webhosting. Tax-deductible expenses are deducted from company profits, so your tax bill is reduced.
- Non-tax deductible – this type of expense is not deducted from year-end profits and therefore does not impact on the company tax bill.
If the expense is necessary and a part of the running of your business, it is a business expense. By asking two simple questions you can identify the business expenses you need to be recording:
- Did I purchase this item or service because I need it for my business?
- Is the item or service used purely for business?
Although establishing what is and isn’t a business expense seems very simple and straightforward, there can be some grey areas leaving people unsure. Company cars, private healthcare and memberships are just a few examples of these. Expenses that have dual purposes, business and personal, will be classed as a benefit in kind. This means there may be no reduction in Corporation Tax, you may not be able to claim the VAT and/or you may need to pay income tax and National Insurance. There may be no financial gain, and a P11D may need to be filed.
The benefits of claiming business expenses
Though it may seem pointless to claim business expenses, they are deducted pre-tax and VAT. This means by claiming business expenses you’ll have more cash in your business and your pocket.
Not only could this be a financial benefit, business expenses could form part of your evidence to support your IR35 exemption status, if required.
It is important that you keep proof of your business expenses. That means that you need to:
- Log all of the information about the expense including; date of the expense, total cost, VAT paid, type of expense.
- Know how the payment was made – if the expense was paid for directly for the company this is the most efficient way of dealing with expenses. If the expense was paid for personally, this needs to be tracked to enable you to reimburse yourself either through your payslip or directly.
- Categorise the expenses. This is important as this drives the amount of tax and VAT that is deductible as well as ensuring you apply the correct amount of VAT to the expense should you go on to charge it to the client.
- Keep receipts and other items of proof for at least 6 years. This is how long HMRC asks for records to be kept.
It's best practise to deal with receipts on the daily or weekly basis; to help ensure every expense is accounted for. This could also help reduce the likeliness of losing a receipt. By tracking your expenses as they happen could help you speed up the process of reconciling your outgoings against your bank statements
Any equipment you purchase for the sole use of the business is fully tax deductible. However, equipment such as laptops may be used as a personal computer outside of work hours, and may have other tax consequences. A majority of the equipment purchased for the business will be classed as an asset and will need to be added onto your asset register as well as tracking the expense. These items include:
- Office furniture
- Storage devices
- Trade marks and patents
- Property (premises)
- Will the item have a useful life of more than one year?
- And, does the item cost more than £100?
Consumables are not the same as equipment. They are not durable items and are, in a sense, consumed by the company. They are typically purchased directly by the company for business use only. Consumables include:
- Printing supplies – paper, ink/toner
- Small office items under £100
- Stationery – letterheads, business cards
- Pens and other desktop equipment
- Postage – stamps, envelopes, packaging
Marketing your business is important and often one of the common expenses that HMRC look at in ascertaining whether you are working outside IR35. Ongoing marketing costs show you are actively promoting your business. Marketing expenses include:
- Website build and development
- Website hosting fees
- Advertising fees – adverts, directory submissions
- Promotional material – brochures, branded items and flyers
Certain utilities will only be used for the business however other utilities may be used at home; like a work phone. It is important to only claim what is being used directly by the business. You need evidence to support your calculations should HMRC question the amount you are claiming on:
- Landline telephone cost
- Mobile phone package
- Broadband fees
- Heating and lighting
HMRC recognises certain professional bodies and personal development tools such as business publications as a necessary business expense. It is important to check that the professional body fee is allowable by HMRC; ensure this by checking HMRC’s recognised bodies list.
It is important to note that lifetime membership fees are not an allowable expense.
All insurance policies designed to protect your business are business expenses. Business insurances can include:
- Professional Indemnity
- Business Contents
- Directors and Officers Liability
Travel expenses fall into two categories:
- Public transport
Mileage involves a little more information as it will be based on the miles you travel rather than a flat cost.
If you’re travelling to and from a temporary place of work using your personal vehicle you can claim for the mileage. HMRC publish a fixed rate for mileage which you can claim without having to pay tax. For a car the fixed rate is 45p per mile for the first 10,000 miles per year, and 25p per mile after this. This allowance is designed to cover the car’s running costs and the fuel costs. Motorbikes and bicycles have other rates.
However, for any travel expense you need to be aware of the 2 year rule regarding travel expenses.
The 2-year rule is set by HMRC meaning that travel and mileage can be claimed while needing to travel a ‘temporary’ workplace. However, after two years the workplace will be considered a permanent workplace and you will no longer be allowed to claim travel expenses. The rule also states that as soon as you are aware that you will be at a workplace for more than 2 years you must stop claiming travel related expenses.
Client entertaining is a major business expense. It is important to note that client entertainment expenses do not reduce your corporation tax bill and you can’t reclaim the VAT back either.
Annual reward events
HMRC allows you to reward your employees and their partners with annual events, such as Christmas parties or summer barbecues. You’re allowed to claim a maximum of £150 per person (including VAT), which can include food and drink; and even transport and hotel stays. What you need to know:
- The must be an annual event and open to all employees.
- The £150 applies per person, and you can even claim for partners who don’t work for your company.
- You can only claim a maximum of £150 per person. If you claim even just 1p over the maximum, then the whole amount becomes taxable.
- It’s not an allowance. You cannot just claim the amount as-is, you must claim for an actual meal or event and provide receipts.
- It’s not just for Christmas parties, this applies to any annual event. You could even have a Christmas Party and a summer event as long as the combined total is at most £150 per person.
- Even if you’re a one-person limited company you can still claim back the cost of annual company events. This means you could treat you and your partner to a festive soiree or a summer getaway!
You can find out more about what constitutes as business expenses here.
This is a simple explanation on expenses allowable within your business. For more detailed information please contact us.