How do business expenses affect tax?
The deduction of business expenses is seen by many as a way to reduce the tax bill for a company. However, this is a complex area of tax regulation and to avoid being caught out, most businesses will benefit from an accountant’s advice to clarify the rules on what can and can’t be claimed.
This will vary with the type of business and the trade or service it is delivering. The other key efficiency in this area is to use smart payment cards and expenses management for employee expenses as far as possible, to provide audit evidence and reduce manual processing.
What can be claimed?
HMRC allows you to deduct operating expenses from your business income. These expenses include any items you have to pay for that are a direct cost of doing business. The regime is relatively strict but, of course, the nature of the expenses claimed varies from business to business. If you have some personal items, such as a home phone, that you partly use for business, then you can claim a proportion of the cost against the company.
This proportionality is important. HMRC expects you to be reasonable in assessing how much you claim as a business expense when it comes to facilities that are partly for business and partly for personal use. What’s more, your company will be coded according to the industrial sector and subsector it is operating in. HMRC has averages for the level of expenses it expects to see in a particular type of business, and you may attract unwelcome interest if your costs are way out of line with similar companies.
For sole traders and more straightforward businesses who work from home for some of the time, the simplest route is to take advantage of HMRC’s set allowances for home working. These vary according to the number of hours you work at home, and you can claim telephone/internet use as well. For these bills, you’ll need to work out the proportion that is for business use.
The simplified expenses regime is not available to limited companies or more complex businesses, so for these undertakings, business credit cards, or prepaid company cards allied to an expense management system, can save significant amounts of time on expense reporting. Even for sole traders, this kind of system can make it far easier to keep business and personal finances separate.
Businesses should also consider implementing an employee expense policy, this will help staff understand what type of spending is and isn’t allowed.
One of the areas that are often not understood well by new business owners is the treatment of capital equipment. This category encompasses items that will have prolonged life in the business, such as computers, machines, furniture and so on. Many people think that they can merely deduct these costs from their turnover, but that’s not the case. You’re only allowed to take off a percentage of the value each year.
To make matters more complicated, the percentage varies according to what kind of capital cost has been incurred. It also changes in the budget. A business can claim a capital allowance each year against its profit, to account for the depreciation of capital assets. However, it’s not straightforward, particularly for a limited company. This is where the accountant really starts to earn their money.
Expenses paid to employees
When it comes to company expenses, the bane of many finance departments, and indeed employees, is Form P11d. If, for example, an employee has used their own vehicle for work and then claimed mileage, this form has to be filled in each year, to account for the benefit in kind which the employee has had during the tax year. They will have to pay tax and national insurance on the amount of expenses paid, and the employer will have to pay employer’s national insurance.
Expenses that HMRC considers to be benefits in kind include health insurance, company cars, hospitality and childcare.
Reducing expenses paperwork
The complexity of the regime, and the need to keep records, generate a great deal of paperwork. However, there are ways to reduce this. One method is through the HMRC exemption scheme. However, one aspect of the scheme is that you must have a system in place that allows you to check employee’s expenses – they are not allowed to review these themselves. Another consideration is that you need to be covering the actual costs, not giving a notional amount.
For this reason, the exemption path works best with a system to manage expenses which will allow the finance department to issue a credit card or prepaid business card that can be used to cover actual expense amounts.