Whether you’re self-employed or a limited company, there are costs involved with running a business. However, not all the costs that people try to put through the accounts are actually business expenses. Believe me I’ve seen few that have made me raise my eyebrows! So let’s take a look at the type of expenses you are able to claim.
You might think that if you use the money in the business bank account to pay for something, you can claim it as an expense. Unfortunately, this isn’t always the case. For it to be an allowable expense, it has to meet certain criteria. We’ll get into the nitty gritty later, but simply put, it must be a purchase for business purposes. It has to be directly related to the business and can’t be on HMRC’s naughty list.
There are several different categories of expenses that your purchase might fall under. Some examples are: office costs, travel, clothing expenses, staff, stock, financial costs, costs of your business premises, advertising, training courses, etc. Each category has different rules you need to follow to ensure they can be claimed as business expenses.
When you put an expense through the business, that purchase could be used to reduce your tax bill. For limited companies, it could be used to reduce your corporation tax. For self-employed it could be used in your self assessment tax return to reduce your income tax. If you’re VAT registered, it could be used to claim back VAT. So it makes sense to put them through the business. However, if you start putting through purchases that are not for the business that’s where problems start. When HMRC cotton on to it they will likely make you repay any reductions in tax or VAT that you have claimed. Plus they’ll likely whack a fine on top too. So make sure that what you are putting through the business is a valid business expense.
There are lots of different expenses your company can claim and if I listed every single one we’d be here all day! So let’s just take a look at some that might crop up in a small business.
I’ve included here some examples of expenses you can claim for e-commerce businesses that you might not know about: working from home, business journeys in a car (for all those trips to the post office!), work clothing (if it’s branded with your logo or has a health and safety element to it), memberships or subscriptions, business calls on your mobile phone, leaflets or flyers, stationery, marketplace fees, travel expenses for a business trip, etc.
This is where it gets a bit complicated. As what one business is allowed to claim, another business can’t claim. That might sound unfair but let me give you an example. As an ecommerce business owner, you might sell on Etsy. The Etsy fees would be allowable for tax purposes. Now if you were a builder with no Etsy store trying to claim Etsy fees as expenses in your accounts? That would be a hard no.
The first step is to look at your business activities. What does the business do? Next, we’d need to look at what the purchase is for and does it relate directly to the business? If it does, will it be used fully for business purposes or partly for personal use? Once we’ve considered all of these questions, we can decide if the purchase can be classed as a business expense and if so, can we claim the full cost or not.
In general, you can’t claim the cost of personal expenses through the business. However, as always, there are exceptions to this rule! A good example of this is a mobile phone. 70% of the calls might be used for business purposes but the other 30% might be personal calls. The 70% that is used only for business can be treated as a business expense. The other 30% you can’t put through the business account. You’d need to make sure it isn’t included in your personal tax return or your corporation tax return. There’s a decision tree at the bottom to help you decide how much you can claim via your business.
Not all expenses are allowable for tax. If you want to confirm whether you are entitled to claim a business expense, your best bet is HMRC or Gov.uk. Check out their website or get in touch with an advisor (ideally in writing). Get it straight from the horses mouth. But I have included some examples below.
As stated earlier, this will depend on what exactly your business does. But some examples of general expenses that are usually not allowed are: fines, penalties, personal expenses, entertaining and training for new skills.
If you don’t know how much you’re spending or what you’re spending it on, how can you make changes? If you don’t track your expenses then you can’t know where you could save money. Or where you could afford to spend a little more. It’s really important to keep business records and keep them well organised, so you can make good financial decisions.
As with every part of business, don’t put it off. Sort the receipt as soon as you get it. If it’s an email, organise it into a folder. Or send it to the cloud. Or to your bookkeeper wink wink nudge nudge. If it’s a physical receipt, sort it into a folder for that month or that supplier. Even better, scan it into your computer and bin the physical receipt. Even even better, photograph it and upload it to receipt management software like Hudboc or Dext.
Business and personal don’t mix, so keep your business purchases separate. If you use your personal card for a business purchase, send the money over straight away from the business account. And vice versa. Bought something personal via the business? Give the money back asap.
I’m always going to recommend using accounting software for any business. It’s easier, quicker and allows you to have a better view of your business finances. For expenses, it has additional bonuses. You can attach the receipt directly to the bank transaction so it is linked together. I can’t be the only person who’s scrolled through their bank and wondered what that purchase was for. With accounting software, the receipt is right there with it. No more questions or confusion!
Another benefit is the ease with which you can pull off reports to use in your business. If you want to know the expenses included in this tax year, it’s a couple of clicks of a button. Or maybe you want to know how much you spent on your business insurance over the last 3 months. Click, click, done. You don’t need to scroll back through all your transactions or dig out those receipts from 6 months ago. It’s a wealth of information at your fingertips.
I’m sorry to say that you have to keep receipts for all the expenses incurred for at least 6 years. Now before you start panicking about where you’re going to store them all, you can keep digital copies. You could store them in the cloud, or ideally in your accounting software or receipt management software.
HMRC can ask to see copies of the receipts for any and all your purchases. It’s how they check, when you claim business expenses, that it was actually for business use. They will take a hard and fast line of “no receipt, no expense”. And they can make you pay tax back and/or fine you. So it’s not worth the risk of not keeping your receipts. Just make sure you keep it organised!
Ell Evan Bookkeeping are not Tax Advisors and so our advice and suggestions on the application of tax rules cannot be construed as tax advice.
