Expenses and the Small Business
You will have a number of expenses that you incur with the day-to-day operation of your business. It's important to understand what are legitimate expenses you can claim, as this will reduce your overall tax bill, and those expenses you can't claim. Generally speaking you can claim an expense if it was "wholly and exclusively for business purposes". If you are in any doubt about an expense you want to claim consult your accountant as they will be able to give you expert advice. Business expenses fall into two broad categories:
Allowable expensesAnything that you buy that is used exclusively in the operation of your business will normally be an allowable expense. Everything from the raw materials you buy to manufacture your business's goods, to the postage you pay to send invoices to your customers can all be claimed as an allowable expense. You can download a factsheet from the HMRC website that gives more details of these allowable expenses:www.hmrc.gov.uk/helpsheets/ir222.pdf.
Non-allowable expensesThe expenses you can't claim for are any costs that are not directly linked to your business's activities. Your own personal drawings from your business are not an allowable expense nor is your purchase of premises or capital equipment as this is dealt with under different accounting procedures usually via your business's capital allowances.
It's important to understand what expenses you can claim back and those you can't as the HMRC will want to see accurate records that show your allowable expenses as they offset the amount of income tax you owe. You can download a guide to expenses and tax from the HMRC website:www.hmrc.gov.uk/guidance/480.pdf.
If you employ any staff you are required to complete for P11D (expense and benefits) for any employee that earns £8,500 of more. The form gives the HMRC details of any benefits or expenses that are being claimed. You can download form P11D from the HMRC website: www.hmrc.gov.uk/forms/p11d.pdf.
Business EntertainingOne area of business expenses that cause small business owners some problems is defining when a legitimate business expense has been incurred when business entertaining is used as part of the general operation of their businesses.
As a business expense, entertainment is defined as any subsidised or free hospitality that you use as part of the general operation of your enterprise. Note that business entertaining is not the same as employee entertainment. This is an important distinction when it comes to claiming VAT output tax. If you hold a staff party for instance to reward your workers, any VAT you have paid (the output tax) can normally be reclaimed, as this event was a legitimate business expense. More detailed information is available in Notice 700/65 on the HMRC website: http://tinyurl.com/yrzkzr.
Business TravelAnother area that can cause potential problems when claiming expenses is how business travel is treated as and expense and how the VAT that may be charged can be claimed back. There is more detailed information about travel expenses on the HMRC website: www.hmrc.gov.uk/employers/ebik/ebik3/business-travel-01.htm.
Business GiftsMany businesses use gifts as part of their normally marketing activities. There are specific rules that you must follow if you want to claim the cost of the gift and/or the VAT that it may have attached to it as a legitimate business expense. More details are in the HMRC notice 700/35: http://tinyurl.com/yrp5rq.
Expenses and a Home-Based BusinessAs many small businesses are now run from home, how business expenses are handled has come under the spotlight. There is a grey area when you want to claim a percentage of your home's heating and lighting as an expense. The HMRC have a flat rate you can claim, but if you want to try and claim more, ask your accountant for help, as you have to carefully calculate the percentage you want to claim.
Note that if you want to claim for the heating and lighting of a single room you exclusively use for your business, this could attract the attention of your local county council you may want to charge you business rates on your room.
The best way of deciding whether some money you have spent can be claimed, as a business expense is to ask yourself if you are using that item or service just in your business. If you are also using that item or service for your private life as well, you probably can't make it a business expense.
Also, look carefully at the business expenses you claim for hospitality and how VAT impacts on this, as you may not be able to claim as much as a business expense or claim as much of the VAT back as you had expected. Your accountant and the HMRC can give you detailed advice if you are not sure what you can claim.