For small businesses and the self employed, claiming as much tax relief as possible should be one of their biggest priorities.
Tax has to be paid out of hard-earned profits, so business owners should be ensuring they pay the right amount of tax - but not a penny more!
As a result, it's imperative that small businesses claim all of the expenditure and allowances that they are entitled to.
In this article, we cover some of the key expenses that small business owners should be looking at- either because there are different ways for them to claim the expenses or because it's an area where savings could be made.
When you're looking at what expenses your business can claim, the golden rule to remember is that expenditure cannot be deducted unless it is incurred wholly and exclusively for the purposes of the trade, profession or vocation. This applies to companies, sole trades and partnerships.
If you work from home, you should be able to claim a portion of your household bills even if the level of business use is minor. Your claim should be based on your total household bills, the area you’ve used and the duration you used it for business purposes.
Do make sure the room is only used for business purposes at the time, but feel free to let the kids do their homework in your office when you’re done. This should avoid the room being treated as commercial premises for rating purposes and also ensure you don’t pay any Capital Gains Tax when you sell your home.
If you operate as a limited company, it is possible to charge the company rent to cover the portion of household expenses you’ve incurred because you worked from home. But it does lead to additional reporting requirements and, as a result, the administrative burden can sometimes outweigh the tax savings.
Charge the business rent (companies only)
If you own the business premises that your company trades from personally, it may be possible to charge the company a rent- right up to the market rent. By charging a rent, you’ve taken some money out of the business and the rent is not subject to National Insurance
However, this can lead to additional Capital Gains Tax when you come to dispose of the property so before making a decision, it is crucial you seek professional advice.
If you’re incurring travel expenses such as train tickets, car park fees, tolls, etc to visit customers/ suppliers you should be keeping your receipts as these should be recoverable. But do bear in mind that travel from home to the place of business is commuting and generally disallowed.
If you’re working from home, travel costs to visit clients should be fully allowable. However, do be careful if you’re working for the same client with some regularity.
Motor running expenses
In terms of using your car, you could opt for claiming a business percentage of your total costs of running the car or claim for your business mileage. HM Revenue & Customs (HMRC) will accept mileage being claimed at 45p per mile for the first 10,000 miles and 25p thereafter.
If you operate as a limited company and own the vehicle personally (which is often the case), your only option is to claim for business mileage. You cannot recover actual expenses.
Purchase cost of the car
If you opt for mileage, this does also cover the cost of the car itself. Otherwise if you go for a percentage of your actual costs, there should be tax relief available for the cost of the car. The greener cars with lower CO2 emissions will offer the quickest rate of tax relief.
Whichever route you go for, you must make your selection when you acquire the vehicle because it may not be possible to switch further down the line.
If your business is VAT registered, there are different ways you can recover the VAT on your business motor running expenses. Should you choose to claim mileage, VAT is recoverable on the fuel element.
If you’re just starting out, it’s worth seeking professional advice on how to structure the ownership of any vehicles used for business purposes and how expenses should be accounted for.
If you’re an existing business, it may still be worthwhile reviewing your affairs as there may be some savings available. In either case, if you’re thinking about replacing any vehicles, talking with an accountant ahead of the purchase will ensure that the vehicle is tax-efficient but still meets the needs of the business.
If you’re not trading as a limited company, you could use the Simplified Expenses to account for the:
- Business use of vehicles
- Business element of household expenses if you work from home
- Costs of living in your business premises
Although the calculation is simpler, the Simplified Expenses may not always give the best results. So you must make sure you check which method is better for you. HMRC has a checker you can use if you click here.
Virtually everything to do with your staff can be tax deductible: wages, pension contributions, training, staff entertaining. With regards to pensions, seek the advice of an independent financial adviser who can give you advice on any workplace pension scheme and your own affairs.
Do be careful with some expenses and giving your employees access to assets to use outside of work - such as cars. Although such items should be tax deductible, some can lead to additional tax for your employee, and more National Insurance and more reporting requirements for you. So double-check your position with a professional if you are uncertain.
National Living Wage
Presently, employers must pay their staff the National Minimum Wage. But from April 2016, employees aged over 25 will be entitled to the National Living Wage which initially will be £7.20 - a rise of 50p compared with the current National Minimum Wage rate.
For an employee working 35 hours a week, this would represent an increase of up to £1,035.58* for an employer when you factor in the Employer’s National Insurance.
Everything you buy for re-sale or materials you use will be tax deductible. But in order to get the timing right of the costs you’re entitled to, it is important to make sure you record what stocks you have left at the end of your accounting period.
The purchase of vehicles was referred to in the Travel Costs section.
For all other purchases, such as furniture, fittings, equipment, machinery and vans, 100% tax relief is available but will depend on exactly what you are buying and when. The tax relief available on such items (known as the ‘Annual Investment Allowance’) has seen significant changes so you must ensure you know how much Allowance you have.
If you’re making major renovations or adaptations to a building, or are looking to build from scratch, make sure you’re fully aware of what tax relief might be available. As a general rule, anything to do with the fabric of the building itself is unlikely to attract any tax relief until its eventual sale.
Transferring personal assets to the business
If you own assets that you would like to use in the business (such as computers/ laptops, cars, etc), you can transfer them to the business at market value.
Tax relief is available, but even if it’s equipment, it won’t qualify for that impressive Annual Investment Allowance that offers 100% tax relief. Instead you’ll only be able to get the less generous Writing Down Allowance of 18% each year. For cars, the allowance could be as low as 8% depending on the vehicle’s CO2 emissions.
Private use of assets in sole traders/ partnerships
Whether you buy the asset during or before the business is in operation, you should consider whether there is any personal use of the assets; either by you or your family members, and account for it accordingly.
Remember, if business assets are being used by your staff members personally, there may be additional liabilities to pay and more reporting requirements.
Private use of company assets
If you operate as a company, assets used personally will lead to additional tax liabilities for the employee or director concerned, and a higher National Insurance bill and reporting requirements for the company. As a result, you should seek advice before making company assets available for private use.
How we can help
If you’ve read something in this article that interests you and you’d like to discuss it further, feel free to contact us.
We can put you in touch with your local TaxAssist Accountant who would be happy to review your affairs and identify any tax-saving opportunities.
The items above are not a complete list, so do raise other costs and situations pertinent to your own affairs with your local TaxAssist Accountant.
*(35 hours x 52 weeks) x 50p = £910 Gross Wages, £910 x 13.8% = £125.58 Employer’s NI
By Jo Nockels
Last updated October 2015
Disclaimer: The information provided is based on current guidance (at date of publication) from HMRC and may be subject to change. Any advice shared here is intended to inform rather than advise. Taxpayer's circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this information, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.