Nobody wants to pay more tax than they need to, but company directors and sole traders often do, missing out on some significant opportunities when it comes to claiming expenses, writes tax advisor and CEO at The Tax Guys, Jonathan Amponsah.
There are “wholly and exclusively” for the purpose of your business expenses that HMRC allows you to claim against your income.
The first step is to identify which expenses you have incurred. For example, rent and rates for your business office, telephone, computer software, business travel, staff wages, marketing costs and insurance all qualify.
It is other expenses, often with a personal component, for example, food and drink which cause confusion. Let‘s look at some examples of the expenses which you can claim but if you’re not careful, you won‘t be able to claim at all.
Business trips and holidays
This is an area where there’s often confusion. To clarify, here are some scenarios.
(1) You can’t turn a holiday into a business trip
This is where claiming expenses against your income is not allowed. When you go on holiday, the purpose of the trip is personal. You may spot an opportunity for some business while you’re there, but you cannot change the purpose you set out with. This means you can’t claim any of the cost incurred while doing business on your vacation.
(2) You have leisure time on a business trip
Let’s say you’re on a business trip somewhere hot and decide to go swimming, without incurring additional cost. That doesn’t mean you’ve ruined the chance of claiming the cost of the trip against your income.
As business was the original purpose of the trip, you can still claim the whole amount through the company. All you have to do is keep receipts for everything that you’re meant to be doing on the business trip and claim that against your income. The reason is that your beach time has arisen as an incidental benefit from the main business purpose.
(3) You extend a business trip
When planning your business trip, you decide to add a day of personal shopping. There’s a great myth that because you’ve mixed business with pleasure, you can’t claim any of the trip expenses because the trip has “dual purpose”.
But, if the primary purpose of the trip is business, the only amount that you can’t claim against is the cost of the additional day. Say the business trip costs £2,000 and your extra day is £300, you can pay back £300 and the £2,000 can be claimed against company income. Include this in board minutes, and keep proper records, so that the main purpose is well documented.
Generally, HMRC don’t allow claiming expenses for entertainment (like food and drink) but where you meet certain conditions, you can.
(1) Entertaining employees
You are allowed to claim £150 a year per head for entertainment. Even if it’s just yourself, as director of a limited company, you can still claim this expense against your income. Because you (the director) are classed as an employee.
(2) An exchange
Let’s imagine you’re a freelance journalist and you want to speak to say Andy, who has a world of experience on a topic you’re writing about. You offer a lunch in exchange for his insight into the topic which you’re researching.
Because Andy is coming to the table with something of value but not benefitting from it apart from getting a free lunch, you’re allowed to claim the expense, even though it appears as entertainment.
(3) A contract
If you are running a training company, for example, and you entertain delegates as part of the course – you may have coffee and lunch breaks include – you’re still allowed to claim that as an expense, because you’re under a contractual obligation to provide food.
Potential expense claims that may surprise you
There are circumstances in which claiming expenses such as care home costs, school fees, and even tennis coaching is allowed and can be claimed as a business expense if you run your business through a limited company rather than other arrangements such as a partnership or sole trading.
For example, your company can pay for school fees as a benefit and pay Class 1 National Insurance. As an employee, you will of course pay tax on it – either at 20 or 40 per cent. The company can then claim the cost of this benefit against its income.
Look carefully into any cost of your business whether you’re a sole trader or director of a limited company (and check HMRC’s guide). Even the least likely cost might be claimed against, as long as it’s done correctly or you seek advice.
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