Knowing what you can and can’t claim as a business expense is vital for your business, but not always that clear cut. So, to help people see the wood for the trees we thought it would be a good idea to look at some of the more common issues business owners have with calculating and recording their expenses, and provide a few answers.
Before we continue though, it’s important to know no two business owners are the same. If we don’t answer your specific query (although we try our best), speak with your accountant so you don’t miss out.
What are expenses?
If you’re unsure what the term ‘business expense’ actually means, don’t worry, you’re not the only one. It’s a blanket term, and a business expense for you may be completely different to another business owner working in a different industry.
In short, expenses are things you buy for use in your business. An example of this is software for a freelance graphic designer, or fuel for a self-employed taxi driver.
What is classed as an expense?
We know it’s annoying when no one can give you a definitive answer of what is and isn’t an expense, but that’s because the answer is literally anything ‘wholly and exclusively used for your business.’
You’re probably thinking “surely they don’t mean everything”, but we really do. If you needed to, for whatever reason, hire a bunny costume, you’d be able claim that as a genuine expense – as long as it directly contributes to the running or operation of your business.
We’ve said it before, but it would need to be used for business purposes. For example, for a video to go on your business page, rather than to try and win an easter bunny competition at your kid’s school.
You do need to be able to prove any expenses you claim are for business purposes only.
But you might be able to if, for instance, you own a dentistry and have Netflix on in the waiting area for your patients, or you’re an actor or screenwriter using it for research purposes.
As long as it’s necessary (either directly or indirectly) for your trade or business – you should be able to claim it as an expense.
Can I claim food as a business expense?
Food is usually classed as a personal expense because you’d be eating anyway regardless of whether you were at work or home, but there are instances where it is acceptable to claim.
If you occasionally travel to somewhere away from your regular place of work, then HMRC deems it allowable to claim back reasonable costs. Note the word “reasonable” here. You can’t have a slap-up meal at The Ritz! Although that would be amazing, and please can we come?
An example of this would be if you were an IT professional. You normally work in your own office, but occasionally travel to install hardware. Whilst on the road, it would also be acceptable to claim for food.
There are some grey areas here, so be sure to reach out to your accountant for assistance. HMRC helpfully produce so-called ‘benchmark’ rates to give us a guide. These are generally for employees, but also give a good guide if you are self-employed.
How do I work out mileage expenses?
As a business owner you can claim back the cost of journeys you make for business. The way you do this depends on multiple factors, such as whether you’re a sole trader or a limited company, and whether your car is owned by yourself or your business.
- Sole traders can calculate mileage expenses based on either their actual costs or with HMRC’s simplified flat rate for each mile they travel
- Limited companies can only claim their actual costs
We have a blog which goes into fuel and vehicle expenses in a bit more detail, but if in doubt – get advice!
Just remember that any mileage you do claim for will need to be ‘wholly and exclusively’ related to your business. That means no sneaky trips to France and claiming it as a business expense. We know what you’re thinking!
While you most likely have the best intentions to be truthful over how much mileage you use for business versus how much relates to your own personal usage, it can be tricky to keep on top of which is which. Using a mileage tracker will help you keep track of all your business miles.
I need training – is this a business expense?
This is a tricky one and isn’t necessarily intuitive. If you need training in a new skill, then as a business owner you can’t claim back the cost against your tax.
But if you need refresher training or you need to extend already existing skills then you can claim it back! Business training is deductible for employees.
Is a business gift an allowable expense?
This is another area of tax law that could fill a book. If you give small gifts of under £50 in value to your employees, then you can claim these back as what HMRC calls a “trivial benefit”. Over this, and it moves into the realm of Benefits in Kind, with both you and the employee paying tax and National Insurance on the value of it, as if it were added to their wages.
Gifts to clients are tax-deductible as long as they are branded and less than £50, but other gifts are classed as entertainment and aren’t. And if you give a gift to a registered charity then the whole amount is deductible against tax. Phew!
Am I allowed to claim expenses from a previous year?
This happens all the time. You incur an expense, and the bill turns up after the year-end. Well, the good news is that in general, yes you can claim for expenses after year-end for up to four years. As long as you are following all the rules for expenses, then you can retrospectively claim it against tax.
Can I claim for any pre-trade expenses?
Yes, you can. Pre trading expenses are purchases you made for the business before you started trading. Anything you would be allowed to claim now the business is up and running is likely to be ok to backdate, as long as it’s ‘wholly and exclusively’ used for your business.
We know you’re probably already sick of us saying that, but it’s one of the key principles of claiming business expenses.
Is there an easier way to work out my business expenses?
HMRC understand working out your actual business expenses can be stressful – so they introduced flat rates (or simplified) expenses instead. Like the name suggests, rather than working out your actual expenses, you can use HMRC’s flat rate to calculate your claim instead.
Simplified expenses can be used by sole traders and business partnerships which don’t have companies as partners. Flat rates can be used for:
- Working from home
- Business costs on some vehicles
- Living in your business premises
For some businesses it can be a much easier way to work out your expenses, but it isn’t for everyone!
How do I show business expenses in my accounts?
Thanks to Making Tax Digital it’s highly recommended that you future-proof your processes and record everything digitally. Essentially, you need to make sure you have up-to-date accurate records of all the transactions which happen in your business, including any relating to expenses. You could create a spreadsheet or other database, or use bookkeeping software to manage everything.
If you’re a VAT registered business you’ll already be familiar with the record-keeping requirements, as MTD for VAT was the first stage of the digital rollout.
Do I need to keep hold of the receipts?
HMRC no longer expects businesses to keep physical copies of receipts, but you should definitely have documentary evidence wherever possible, whether they’re electronic or paper copies! As long as you can prove that you spent the money and what it was for, then you are good to go.
Good accounts software (we won’t be subtle, we mean us but other providers are available) will include a receipt upload feature which allows you to take a photo of the document or upload it from your device, and assign it to a transaction without needing to keep the original bit of paper. It’s nicer than rummaging round through a shoebox or in the footwell of your car if you need to check something!
Understanding different types of business expenses
Although it doesn’t affect how you calculate and claim your expenses, it’s sometimes useful to break your spending down into categories so you can monitor things more easily, such as expenses versus costs.
There are different ways to do this, but to give you an example, overheads are costs which help keep the business running but not directly related to the products and services you provide. They might be ‘fixed’ where the amount stays the same each time you pay it (such as rent), or ‘variable’, where the amount fluctuates based on your usage (like some utility bills).
Looking at your expenses like this makes it easier to see the spending which is really essential to the business, or where it could be more efficient.
It can also help you plan your finances. For example, you’ll need to pay rent even if you close for a week, but you might not need to buy other supplies whilst you’re off.
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