When you claim back expenses you lower the profit of your business which in turn lowers your tax bill. This guide exists to save you money by ensuring you know everything you need to know about expenses, what best practice looks like, and most importantly, what can be claimed.
There is very little difference between how expenses work for Sole Traders, Partnerships, and Limited Companies, but where such a difference exists, it is highlighted.
The key principles and example
The core principles underlying HMRC’s approach to determining that an expenses is allowable, i.e. can be claimed and used to reduce your tax bill are:
- The expense claimed must be ‘wholly and exclusive’ for the business
- Must be ‘fair and reasonable’
- Some expenses are covered by special rules, e.g. fuel and mileage, home use as an office, travel costs and meals (a.k.a. subsistence)
Expenses for services or items that are ‘dual purpose’, i.e. are used by both you and the business are more complex. For example, if you have a mobile phone contract and demonstrably 30% of its use is for business calling, then it would be allowable to claim 30% of the monthly cost.
Some dual purpose expenses will have a use for either you or the business that is incidental:
- When you buy protective work clothing, your personal use of this expense is incidental, so you can claim the expense
- When you have a landline at home you pay for line rental; your business’ use of the line rental is incidental so you cannot claim this expense (however you can claim for the share of call costs that are for the business.
Expenses best practice and rules
You have a legal obligation to keep accurate records of any expenses claimed for six years. Receipts fade, so best practice is to keep a digital copy of all of your expenses and keep a breakdown.
Apps and approaches you can use
At a minimum, you need to keep your digital copies of your receipts somewhere safe and backed up. A popular cheap and simple solution is to store a copy of all of your expenses on a Google Drive.
The next level of efficiency up from this is to use an invoice capture app, and in our opinion Auto Entry is the best in class app on the market. The benefits are:
- Simply forward expenses to your dedicated Auto Entry email address associated with your account
- Auto-forwarding rules can be set for your regular supplier invoices, i.e. set-and-forget
- Snap a picture of any paper invoices in the app
- The app lets your accountant efficiently create and reconcile your expenses with the associated transactions in your bank account (required for bookkeeping)
There is no correct approach of course and preferences are subjective. The Auto Entry approach is more efficient and overall saves time for which there is an associated cost for the software. Storing all receipts on a Google Drive and dealing with them all in one go, is a very cost-efficient approach, but you only gain accurate visibility on your profit once a year.
Expenses are claimed when you file your year end accounts, so that is when Sole Traders file their Self Assessment or when Limited Companies file their Corporation Tax return. For a Limited Company, any business expenditure you pay for personally can be reclaimed from the business at any time (note, here reclaimed just means reclaiming the cash from the business, not obtaining tax relief; the tax relief is gained when the company files its tax return including this expense).
Benefit in kind
Some expenses for employees are considered by HMRC a benefit in kind. Any expense that fits this category will give rise to additional tax and reporting for you. The general principle is that if you pay for an expense that primarily benefits the employee, then HMRC will effectively treat the value of the expense as additional salary, which you need to report and pay Class 1 National Insurance Contributions on.
Allowable expense categories
What follows is an non-exhaustive list of expenses that you can claim for your business. This list is ever-evolving and we update whenever one of our clients requests a clarification.
Get in! These are allowable, except any work for your personal Self Assessment, i.e. for Sole Traders we would separate out this cost (typically £15 of your monthly fee is the Self Assessment portion). Company Formation fees can also be claimed.
Accommodation while on business travel
You can claim your accommodation costs when travelling for business. The fair and reasonable principle will apply so a stay at the Savoy is out, nor apartments with more than one room, etc.
What if I extend my stay after my business meeting?
In that case it becomes a dual purpose expense, and you may expense the portion of the holiday that related to the business. This is, however, risky and we counsel against it wherever possible, as HMRC occasionally may conclude that the trip was personal and the business element trivial or incidental, invalidating the claim entirely, and then out go the associated train/flight/mileage expenses.
Broadband / Internet
You can only claim this if you can clearly split the business use from the personal element which is rare. The exceptions are if you have two broadband lines if you had no broadband previously but need broadband for the running of the business.
Cars, vans, travel, fuel and mileage
Company cars have their own rules. Get in touch with us before considering this.
Travel costs for business, e.g. to meetings, hiring a van for moving office, etc, are generally allowed. Commuting costs for getting to work and fines are not allowable.
All donations allowed. Be as charitable as you like.
Food and Drink (Subsistence) Expenses
In general, not allowable, however, in some circumstances these are allowable.
These are not allowable expenses, with the one exception being that you are permitted to claim up to £150 of expenses per head annually for company events, most commonly a Christmas party.
Chairs, tables, laptops, software are allowable as long as they are genuinely for business use, i.e. the personal use is incidental.
Gifts to employees are allowed if:
- it cost you less than £50
- it is not cash or a voucher
- it is not related to work performance
- it is not in part of their employment contract
If the above conditions are not met, then additional tax implications allow as it becomes considered a ‘benefit in kind’.
Use of Home
There are different rules for use of a home office depending on whether you are a sole trader or an employee (e.g. a director) of a limited company.
If you are a Limited Company and you use your office for work, then HMRC lets you claim £6 per week (£4 per week prior to April 2020) as an allowance for this expense. You can alternatively rent a portion of your home to your business and this would be an allowable expense. In this case you would need to own the property, draw up a rental agreement, and charge a reasonable rent. This typically means that you will additionally need to file a Self Assessment personally as you now have rental income which has to be declared.
Mobile phone and home telephone contracts
For a Sole Trader you can include your phone bill as an expense but you need to provide a ‘reasonable and fair’ logic for splitting the cost between you and the business.
For a Limited Company there are some special HMRC rules that apply, that hinge on who has the phone contract:
- Phone contract is with the company. HMRC permits companies to provide employees with one mobile or SIM tax free and with no ‘benefit-in-kind’ taxes arising and is an allowable expense. Personal use is allowed but should be ‘fair and reasonable’ which translates to, it should not be significant relative to the business need. Note, business tariffs are generally slightly higher, so check that the tax saving exceeds the added cost.
- Phone contract is with the employee. If the company pays this expense it would count as a benefit in kind and you would need to report it on the P11D and pay Class 1 NICs. If the contract is Pay As You Go, then the business would not pay taxes or have to report on the minutes that are for business use.
These are allowed. Be aware there is a £40,000 limit total (personal and employer) contributions that can be made annually by individuals before incurring tax on further contributions.
Salary and NICs
The salary and National Insurance Contributions you pay are allowable expenses.
How does RJF handle expenses?
You provide us your expenses by forwarding them on to your Auto Entry email, either as an image, PDF attachment, emailed purchase order, or as a zip folder of all expenses.
You don’t have to do anything else. We’ll extract the figures, dates, and currencies, match it to the correct transaction in your bank account and classify it to the correct accounting category. We’ll let you know if an invoice is missing or duplicated.
How do I get started?
If you would like to have us handle your expenses and bookkeeping, along with any accounting services then the first step is to see how much it would cost and send us a message.