Few things in life are free, and running an enterprise incurs various mundane costs and incidental expenses, many of which can be claimed back through the tax authorities. But with the rules on expenses seeming to change every year, many business owners remain confused about which allowances and reliefs apply to them, and what can be reimbursed through their company.
Clive Lewis, head of SME issues for the Institute of Chartered Accountants For England and Wales (ICAEW), explains that much depends on your trading status. Rules vary depending on whether you’re a sole trader, partnership or have limited company status, for example. But there are some common areas where expenses are often eligible for tax relief – and the sums you can save can be considerable.
Business mileage, fuel and travel
Lewis points out that it’s common for sole traders to put cars or vehicles used for professional purposes through the balance sheet, with the business paying all of the related costs, such as insurance, petrol, and repairs. A percentage can then be added back for personal use. Limited companies, however, usually avoid the complications involved in this approach, since the car qualifies as a benefit in kind. Many employers opt instead to reclaim business mileage, which requires keeping an accurate record of miles driven for company purposes. It’s possible to claim 45p per mile for the first 10,000 miles in a car or van, then 25p per mile thereafter. Motorbikes can claim 24p per mile for any distance. If you’re particularly fit or environmentally minded, you could even claim for travel on a bike, at 20p a mile. Bus or train tickets may also be tax deductible if you can prove that the journeys were for work purposes.
Professional fees and subscriptions
If your job requires you to be a member of a professional body or to pay for a licence to practice, the cost of this is likely to be eligible for tax relief. HMRC gives a list of allowable bodies on its website.
Tools, equipment, and specialist clothing
Hairdressers who have to buy equipment to cut and style customers’ hair can claim back the cost of these items, as can a plumber who has bought essential tools. When it comes to clothing, if your work requires you to wear a uniform or protective clothing, the costs are deductable from your tax bill. Someone who wears a business suit every day is unlikely to be able to argue that their clothing bill is tax-deductible. Lewis suggests that those who have what is classified as work clothing may even be able to claim for the cleaning of clothes in some instances. He comments:
“I’ve known people argue that, in order to present a professional image to do their work, regular cleaning of work wear is essential. For example, a mechanic does work that inevitably marks his overalls with oil, but he will still need to clean his clothes regularly to be presentable for customers.”
While a mobile phone is an essential piece of kit for any business owner in this day and age, telecoms remain something of a grey area in tax terms. SME bosses can’t claim the rental costs, but they can claim for calls. However, since most mobile contracts have bundling deals it’s almost impossible to determine which proportion of calls has been for professional purposes and which for personal use. The tax authorities often give sole traders generous leeway on this point, as they can argue that a large proportion of their mobile calls will always be business-related. But those with limited company status may need to be more cautious. It can be wise to take out a mobile contract in the name of the business, rather than just adding the company name to a personal contract. If the contract is directly to the limited company, then phone costs are usually an allowable expense paid directly to the business under HMRC rules.
Rent and household expenses when working from home
If you are a sole trader and operate your business from your place of residence, you could make a use of home as office charge, though this must relate to the amount of space you actually use for work purposes. For example, if you rent and use about ten per cent of the property as your office, you can claim ten per cent of your rental costs as work expenses. You can also charge for a percentage of lighting and heating costs, as well as a proportion of mortgage interest. Once again, things are more complicated for limited businesses – those working from a personal residence can charge a flat rate of £4 a week for business costs, but they could be eligible for more if they can demonstrate significant additional charges related to their enterprise.
Some items of machinery or furniture – desks or filing cabinets, for example – or even fixtures could be claimed as capital allowances rather than expenses. In essence, items that you need for work that are likely to depreciate in value through use are likely to be eligible. But Lewis argues that some things are still open to interpretation.
“You have to define what is revenue expenditure and what is capital. For example, printers have become so cheap and disposable that some would argue that they qualify as revenue. Another issue that has arisen in recent years is people building offices in their gardens. It’s possible that the building costs and some of the contents may be claimable as capital expenditure, but you need to be honest about what is really for work use and what’s not. If it’s really a summer house, then think again.”
HMRC’s website has more information on how to calculate capital allowances and what’s allowed.
Your strongest ally when trying to make sense of the tax and expenses minefield is likely to be your accountant. Not only do they have the expertise to tell you what you can and can’t claim, they should be aware of any of changes made to the tax system and will alert you to them. Lewis advises talking to your accounting professional about all of your costs, rather than trying to figure out the expenses you can claim yourself through online calculators. As he says:
“It’s a complex field and it can take regular business owners much longer to do the research themselves than it would to talk to the people whose job it is to know these things.”
He also points out that the clock is ticking to fill out and submit P11D tax forms detailing directors’ and employees’ benefits in kind. Gathering this information takes time, so start working on it now if you haven’t already done so to avoid missing the final deadline in July.
And Lewis emphasises two further points with relation to claiming any expenses through your firm: firstly, record-keeping of any costs and expenses is absolutely vital.
“In this digital age, many people don’t keep paper records like receipts,” he says, “but you may be called upon by HMRC to produce records going back six years, so make sure you have all the relevant information available in an organised form.”
And he also stresses that any expenses claimed against a business must be wholly and exclusively incurred for trade.
“I see some business owners who are ignorant of the costs they could be claiming back through the tax authorities. But others are at the opposite extreme and put through as many receipts as they can. If there were a tax enquiry or records check they could find themselves with a significant arrears problem. No one wants that, so be honest, be reasonable, and make sure you have the material evidence to back up any claim.”
HMRC offers more in-depth guidance into what specialist expenses you can claim on its website.
Image courtesy of jesadaphorn / FreeDigitalPhotos.net