Business Expenses: What you need to know
Businesses of all sizes run with expenses as well as income. Sometimes the expenses are small – the occasional ink cartridge or £10 spent on a Facebook advertisement – and in other cases there are businesses that seem to have a never-ending list of large expenses.
As well as recording expenses to keep track of your business finance, you can use qualifying expenses to reduce the amount of tax that you pay.
How do qualifying business expenses work?
Any qualifying business expenses are added up, to create an expenses total. This total is then deducted from your total business income. Tax is paid only on the remaining figure, after business expenses have been taken into account.
It is important to be sure that you’re accurately recording your business expenses and that everything you’re including is for the benefit of the business. It’s vital that you don’t get personal benefits (such as a home internet connection or mobile phone contract, personal travel mileage or training not relevant to your job role) mixed up with business benefits. Staff salaries are included, subject to a few rules, and so are stock costs.
Here are just a few of the other potential allowable expenses:
Advertising and Marketing
If you invest money in advertising and promoting your business, then you may be able to claim that money back as a business expense. Advertising and marketing expenses might include online advertising, newspaper and magazine advertising, TV and radio advertising and any design and print costs.
Employee Travel Expenses
If an employee is required to travel during working hours, then the employer is responsible for covering associated costs. This may be the price of a train ticket, or might involve covering the costs of an employee using their own vehicle to get around.
If you’re paying for an employee to use their own vehicle, then keep in mind how much you can pay them. For a car or van, you can pay 45p per mile for the first 10,000 miles and 25p per mile for everything above this limit. If you choose to pay more, your expenses will need to be reported for tax and NI purposes. In these cases, the money over the ‘approved amount’ would need to be added to an employee’s pay to go through all of the usual deductions.
Note that a ‘passenger payment’ of 5p per mile can be paid tax-free to an employee, if they’re carrying another employee in their vehicle. The mileage allowances are different for motorbikes and cycles.
If travel includes an overnight stay then accommodation costs are tax deductible, as are the costs of one daily meal if working for more than five hours, or two daily meals if working for more than ten.
Accountancy and Banking Costs
If you pay a bookkeeper or accountant, then you can claim tax relief for the full amount that they charge when working on your accounts. You cannot claim for time that is spent on advice.
You may also be able to claim back any financial outlays such as bank charges and business insurance premiums.
Business expenses can include an annual event for staff entertainment, such as a summer BBQ or Christmas party. The maximum allowance is £150 per head. Other types of business entertainment, such as in-office entertainment throughout the year or money spent on impressing a client, will not be tax deductible.
Any equipment that is used for business purposes can be covered as a business expense for tax relief. This may include PCs, laptops and other gadgets, furniture, printers and ink cartridges, stationery, computer software and apps, which must be used for business purposes primarily.
You can receive tax relief on some benefits that you offer to employees, such as childcare vouchers and company eye care and healthcare offerings. This does not extend to corrective treatments, such as glasses, but can cover the costs of any tests including an annual health check.
Auto enrolment regulations require that companies provide a pension for each employee. You can claim 100% tax relief on pension contributions.
Costs Associated with Working from Home
If you run a small business or work as a freelancer, then you might have associated business expenses for working from home.
You cannot claim for phone or internet costs unless you have a separate line for your business, or you can prove exactly what has been spent on business calls and internet use. You can, however, claim a maximum of £4 a week for using your home as your office.
In order to claim your weekly allowance, you should have a designated workspace and should calculate your allowance accordingly. The allowance is a ‘shortcut’ to cover energy costs and other associated expenses of setting aside your workspace.
If you can prove that a training course or qualification is building on existing skill, and is for the benefit of your business or company, then you can claim tax relief on the business expenses associated – the course and qualification itself, and any required travel and accommodation.
There are strict rules about what will and will not be allowed, and so it’s important to protect yourself in the event of an investigation. The training should be improving skills required for an existing role, and should not be for retraining or for learning a new skill, unless you can easily prove that any new skill is essential in the workplace and will be used only for the employee’s current role and position.
How do you know if you’re claiming business expenses correctly?
You don’t want to be caught out claiming tax relief on expenses that won’t be allowed, which is why it pays to err on the side of caution. If you’re unsure whether you can include something as a business expense for tax relief purposes then you can contact HMRC for clarification.
Always store documents and evidence securely, including staff expenses claims and details about salaries and bonuses. You should keep everything you need, including all receipts and statements, under the assumption that your expenses claims will be investigated.