As small business owners, contractors and freelancers are able to claim certain business expenses against their taxable income. What can be claimed is determined, in part, by whether or not a company falls under the IR35 classification. Our complete guide to business expenses explains, in detail, what qualifies as a business expense and what does not. We provide concrete examples to help make understanding business expenses easier. This is a complex area of accounting for small business owners, and one that requires quite a bit of knowledge. Make sure you are doing it right by taking advantage of this free guide.
How you claim business expenses determines your overall tax liabilities at the end of the tax year. Fortunately, nearly any expenses incurred wholly and exclusively under the normal operations of your business can be claimed as legitimate expenses. The money you spend to pay for these things is not subject to income tax. Greater tax efficiency can be enjoyed by structuring your legitimate business expenses correctly, thus reducing tax obligations and increasing take-home pay.
There are strict guidelines governing all expenses and how they can be claimed. Travel is one good example. If a contract requires you to work at a location you would not otherwise be working at, you may be able to claim the costs of travelling to and from that location. You can also claim expenses incurred as a result of overnight stays away from home.
The key with business expenses is knowing how the law applies to your particular circumstances. Expenses decrease your profits, and income tax is paid only on your profits. That means legally reducing the total amount of income you pay taxes on, through legal expense deductions, is a good way to reduce your tax liability. However, expenses can be an open door for trouble. Using an accountant to help you manage business expenses is a wise idea.
It is not unusual for the new contractor to not pay a lot of attention to expenses because of the lack of understanding. The new contractor may believe he/she does not have enough expenses to worry about, so he/she just reports all of the income as profit. This is never a wise idea. The contractor should always consider expenses for tax reporting purposes, just in case greater tax efficiency is possible.
Contractors should note that VAT, PAYE, and dividends also play a role in tax liability. All three factors have to be weighed against claiming business expenses to determine the most tax-efficient way to operate your limited company. This is why we constantly recommend limited company directors work with qualified accountants.
arlier in this guide, we gave you a basic list of the kinds of expenses that can be legally claimed by limited company directors. Now let us get into some details. HMRC uses a very strict definition to determine legally allowed business expenses. That definition stipulates that any claimed expenses must be incurred wholly and exclusively as part of operating your business. If you derive any personal benefit from such expenses, above and beyond the operation of your company, they might not be legally allowed. Also understand that business expenses differ for companies that fall under the scope of IR35.
Mobile Phone – A mobile phone used exclusively for your business activities can be claimed as a deduction in whole. The contractor who uses his/her phone for both personal and business use must keep track of business related minutes and texts so as to claim only what qualifies as a legitimate business expense.
Clothing – There are times when a contractor requires the purchase of branded clothing or certain types of protective clothing needed for specific kinds of work. These clothing items are eligible to be claimed; other clothing that could be used outside of work cannot be claimed.
Accountancy Fees – Accountancy fees are incurred as an expense of running your business. If you use an accountant, he or she will know enough to claim accountancy fees as business expenses. Legal and other similar fees may also be claimed if they meet the same criteria.
Meals and Travel – This area of expense is a tricky one to navigate. A meal that can be claimed must be one that is purchased as a result of an overnight stay away from home or working at a location where one does not typically work. Travel expenses are similar. When travel is accomplished by car, the contractor must keep track of mileage in order to determine the amount that can be claimed.
Accommodation – When work requires the contractor to stay away from home overnight, the cost of accommodation can be claimed. There may be additional expenses related to that accommodation that also qualify.
Training – If the contractor receives training wholly and exclusively for the purposes of running his/her business, that training can be claimed as an expense. The training must be documented as being necessary for business operation or the fulfilling of a particular contract.
Office Expenses – Any expenses incurred in maintaining an office can be claimed. For example, stationery items used exclusively for business purposes qualify as a legitimate expense. The same applies to equipment, tools, electronics, etc.
The business world is such that there are some expenses that fall in that grey area between legitimate and illegitimate. The final section of this guide will deal with some of those periods. Please note that individual attention must be paid to your circumstances to determine whether the situations described below apply to you. The accountants at ICP can help you navigate these grey areas.
Partner Salary – Paying your partner a salary is not a problem if that individual works through your limited company and generates income for your business. Problems may arise if your partner is working for just a few hours per month at the standard rate of pay.
Furniture Purchases – Given that the average contractor maintains an office at home, some furniture purchases qualify as legitimate business expenses if certain criteria are met. For example, the personal use of such furniture must be minimal. Second, the cost of the purchase must be commensurate with the business you are operating. You must also be able to justify furniture purchases if investigated by HMRC.
Rental Payments – Business owners can rent space outside of their homes if they deem it necessary. For that rent to be a legitimate expense claim, the rental agreement must be written in the name of the limited company. It is also helpful to pay rent directly from the business bank account and to maintain documentation justifying the need for office space for the daily operation of the business.
Office Construction – Some contractors choose to build a separate office on their household premises for the purposes of running their businesses. Construction and ongoing maintenance costs can only be claimed if: they are not excessively high, they can be justified as a necessary part of doing business, AND the business owner derives no personal, non-business benefit. Claiming office construction may reduce the contractor's PPR benefit and subject him/her to capital gains should he/she decide to sell the property.
Clothing Purchases – As stated earlier, clothing can be claimed as a business expense if it involves branded clothing or items necessary for protection. Clothing purchases cannot be claimed just because a client requires a uniform. If the clothing is neither branded nor protective in nature, and it could be used normally outside of the work environment, it cannot be claimed as a business expense.
Company Cars – Company cars can be claimed if they are wholly and exclusively used for running a business. However, claiming a company car is rarely tax efficient. Contractors should consult with their accountants to determine whether this applies to their situations.
Business expenses can be a complicated matter for contractors who do not understand tax law. Things are made even worse when a limited company's activities fall within the scope of IR35. We strive to make this part of running your business as easy as possible through the services of our experienced accountants and are customised, online accounting software. We urge you to take advantage of our services for greater tax efficiency and higher take-home pay.
ICP is more than happy to assist your limited company with business expenses when you sign up for our flat rate, fee-based service. Managing your business expenses is just one of a long list of services we provide contractors and directors of limited companies.
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