Many small business owners neglect to enter small expenses on their books because they don’t think it’s worth the effort. If you are one of them, the following may be for you. That’s because by doing so, you are missing out on the opportunity to offset expenses against profits. Even small amounts add up over the yea, and can be used to reduce the amount of tax you pay on your profits.
Even small amounts – £10 or less – several times a week, can add up to hundreds of pounds over the whole of the financial year, so do get into the habit of keeping receipts for meals out, coffees, newspapers, travel and any other incidentals which you need to pay for in your working day. Whatever you decide to claim for, you’ll need proof, so don’t forget to keep all your receipts and file them away weekly to enter them into your book-keeping – or ask us to do it for you.
You can deduct genuine expenses and offset them against your profits. You’ll need to check that they are allowable expenses (as designated by the Inland Revenue) and that they are appropriate and necessary for your particular line of work or business.
Do make every effort to keep your business and personal expenses separate – for example by having separate accounts and separate debit and credit cards. That will avoid you mixing up your finances.
Use of Home
Home is not only where you live, but often a place where your business operates from. Many of the costs for household expenses cover both trade and private use. For example, a self-employed person who uses electricity both privately and for the trade will normally get one electricity bill. That part of the cost attributable for business use can be allowable for tax purposes.
What is allowable depends on the particular facts, including the extent and nature of the trade activities undertaken in the home. Different businesses will run their businesses in different ways. There is no fixed proportion of costs allowable in a particular type of business, although the same type of trade conducted in the same way may be expected to result in similar deductible amounts.
The factors to be taken into account when apportioning an expense include:
- Area: what proportion in terms of area of the home is used for trade purposes?
- Usage: how much is consumed? This is appropriate where there is a metered or measurable supply such as electricity, gas or water.
- Time: how long is it used for trade purposes, as compared to any other use?
You should also be aware that home insurance may not cover your business – things like computers, stock, records etc.), so it is advisable to discuss this with your insurers.
There are different rules for Ltd Companies on the way you claim and offset expenses. You should always have a Company bank account and you can deduct any business costs from your profits before tax. You must keep personal and business use separate.
What you can claim
- Travel – including trains, taxis, buses and business mileage, or parking
- Office equipment
- Stationery – don’t forget ink, paper, envelopes, stationery and computer equipment
- Phone and internet usage
- Clothing – if you need to wear a uniform
- Staff costs
- Stock or raw materials
- Financial fees – insurance or bank charges
- Cost of your business premises, or a share of your home
- Marketing costs – websites, advertisements, promotions
But there are different rules for employees of a limited company – such as directors – and those operating on a Self-Employed basis. HMRC are presently trying to align the differing treatments. You do need to be careful, so please discuss with us in the first place.
How long do you need to keep receipts ?
HMRC can request proof of expenses up to six years after they’re claimed. So don’t throw out your paperwork and receipts after you have filed and had your tax return accepted for that particular financial year, as you may need to produce them later.