Limiting tax liabilities with business expenses
Profit margins can be razor-thin for small businesses, whose income can by hit all sorts of problems, from poor weather, late payment, and yes, a global pandemic.
There are a wide range of expenses that can help to reduce their business costs, but many expenses still go unclaimed – with some estimates suggest that £168 million in small items not expensed by small and micro businesses
However, when seeking to reclaim some of these costs as expenses it is important to clearly understand what is and what is not allowable.
Furthermore, because an expense is allowable it does not mean that it is always beneficial to claim it as it may be deemed as “Benefit in Kind” (BIK), which would result in a charge to the personal tax of employees.
It is therefore important to understand what is genuinely allowable and what is advantageous to claim as an expense.
As a basic rule, any expense that is claimed must be wholly, exclusively and necessarily incurred for the benefit of the business.
At times there may be a duality of purpose in a given expense, for it to be allowable the main reason for the expense must be business motivated and the personal element be incidental to the main purposes.
Here is a selection of allowable expenses which can help you make the most of what is on offer:
- Accountancy fees – are an allowable expense, except fees relating to personal taxation.
- Charitable donations – Where they are made to a UK registered charity (cannot cause a loss in the accounts) these are allowable. Receipts should be obtained and retained.
- Clothing – Only allowable if it is specialist clothing that would not be worn in an ordinary day to day environment (e.g. safety boots, helmets, goggles)
- Entertaining – The entertaining of customers or business associates is not an allowable expense.
- Insurance – Any policy that is solely for business purposes can be claimed as an allowable expense. Medical Insurance is not allowable.
- Incidental Overnight Expenses (IOE) – Whist staying away from home a contractor can claim £5.00per night in the UK and £10.00 per night if abroad for personal incidental expenses.
- Mobile Telephones – Provided by the company for business purposes are an allowable expense.
- Pension contributions – Provided by a Company are allowable but there are various factors and circumstances that need to be considered.
- Website costs – The cost of website building, hosting fees, domain fees and email hosting are all allowable expenses.
In addition, employees forced to work from home because of the pandemic have received a tax break. In October 2020, HMRC confirmed that 2020/21 would be a special year because of coronavirus.
People working from home can claim the full £6/week working from home fixed rate relief for the whole year EVEN if they only worked from home for some weeks or part-time. That is a relief of £312, which is worth a tax saving of £62 per year for a basic rate taxpayer and £124 per year for a higher rate taxpayer.
Normally an employee can only claim the £6/week relief for weeks they have worked at home. The only qualification is that you were required to work from home at some point in the tax year 2020/21.
For help and advice on expenses, please contact our experts at WMT – Chartered Accountants today.