Why does it matter if I keep a receipt? If the money is coming out of my business bank account, surely that’s all the evidence I need that it was a business purchase?

To claim a cost as a business expense you need to prove that what you’re spending money on is “wholly and exclusively” for the business. HMRC check that you’re not putting personal items through the business accounts to try and lower the amount you’re paying on your self-assessment tax return or corporation tax return. If you haven’t got a receipt to prove that cost was a business expense, they might turn around and say they’re not counting that. This could then affect the returns that you’ve done causing you to owe them more money or worst case scenario they could fine you for submitting an incorrect return.

Certainly, if you’re VAT registered, it’s essential that you have a receipt. You need to see exactly what VAT rate has been applied to your purchase, if any. If you don’t have a VAT receipt, there’s a high probability you won’t be able to claim the VAT back on your purchase because you don’t have proof that they are a VAT registered seller.

Remember that on your bank statement, quite often payments will come through as just a reference (which might be a load of random letters and numbers) and the amount you paid. Without a receipt to prove it was a business expense how would HMRC know it wasn’t a personal purchase?

Why does it matter whether it was a purchase for some stationery or my electricity bill?

Well, there’s several reasons why it matters. Firstly, you need to understand the difference between your gross profit and your net profit. To do that, you need to know whether the receipt is for something that is part of what you sell or an expense. For example, if you sell cakes and you bought flour to make the cake, that is different from if you bought some new pens or a bill for your electricity. The flour counts as something you buy, use up making your cakes and then it goes out of your business again when you sell the cakes. Whereas your new pens or electricity bill is an expense of your business.

So, starting at the top, you have your sales total which is the total amount of money you’ve made from selling your cakes (i.e. you sell 2 cakes at £10 each, your sales total is £20). When you take off the amount of money you’ve had to spend to be able to make your cakes, for example, your flour, eggs, milk, etc, that then gives you your gross profit (i.e. the ingredients cost £5, gross profit is now £20 – £5 = £15). After that the rest of your expenses come off such as your new pens and your electricity bill which leaves you with your net profit (i.e. pens and electricity cost £10, net profit is now £15 – £10 = £5).

It is important to know exactly what you’re spending money on so that you can see areas where you need to save money and areas where you could afford to spend a little more. If you’ve got your receipts you can easily allocate all of your spending in your bank to the correct section in your accounts. Now you can quickly see your totals and you might be surprised to find out the amount you’re actually spending on those pens that are very pretty to look at but only last 5 minutes!

So although it might seem a pain, that receipt is important! You can save yourself some time if you get yourself some software to deal with them. If you use Xero then Hubdoc is free for certain subscriptions but there’s also Receipt Bank and Auto Entry to name just a few. With these you can simply take a photo of the receipt or scan it or email it and the software will read the information from your receipt for you. You then choose the correct account and send the receipt to your chosen accounting software.

Or if you want to save yourself loads of time then let me deal with it all for you!