Business expenses are at an all time high in the UK. A 2021 report by Dext found that ‘overall expenses across all aspects of business increased from £801 per submission in May 2020, to £947 in May 2021 as per average monthly transactions’.
According to the report, the four main areas of expenditure, from lowest to highest, were as follows:
Considering this report followed the timeline of the Covid-19 pandemic, it’s not surprising that travel and rent were on the lower end of the costs spectrum. Nor is it any great wonder that PPE and insurance rank higher. Many businesses needed to put health and safety measures in place to remain open. Protecting their assets was also more important than ever, which is why insurance expenditure was as high as £5,373 by April 2021.
With the cost of living set to rise, it’s vital that business owners claim everything they’re entitled to off their tax bill. We’ve written a detailed blog about self-employed business expenses and how to claim them. But is it as simple as following a list?
Sakura Business Solutions MD Damien Connolly says that complications arise when the line between ‘business’ and ‘personal benefit’ is blurred. ‘The strict HMRC rule is that expenses can only be claimed back or reimbursed to a director or employee where they are ‘wholly, exclusively and necessarily incurred on behalf of the business’.’ Says Connolly, ‘Therefore, the whole debate around ‘business expenses’ is all based on that ‘simple’ rule.’
Let’s break this down.
Business vs Personal Expenses
For most self-employed people, business and personal expenses often overlap.
Paul David Smith has been a self-employed photographer since 2008. ‘My business involves a lot of travel to photo shoots all over the UK. I always claim fuel costs back for these shoots at 45p per mile.’
The key is knowing how to separate the two, and having a paper trail to back you up.
Finance expert Carl Ford suggests business owners store receipts electronically. ‘A common pitfall that business owners make is to lose receipts.’ Ford explains, ‘I recommend using Dext, which gives business owners the ability to snap pictures of receipts at the time of a purchase – or you can email in receipts as well’.
There are even tools you can use to help keep tabs on your business mileage. ‘I use an app called MileIQ which is included in the Office 365 subscription’ Says Ford. ‘The great thing about MileIQ is that it automatically tracks your mileage, so you never forget a trip – and it’s easy to classify them as either business or personal travel.’
If you’ve bought a vehicle for business purposes, you can often claim a deduction for capital allowances. This is dependent on things like your registered company status, the vehicle’s CO2 emissions and other factors.
‘Over the years,’ Smith explains, ‘I’ve learned that tax relief can be claimed on things like vehicle insurance, repairs & servicing, parking costs and breakdown cover. These need to be business costs and not personal – but during my business travels, they really add up. So it’s worth making sure you claim the relief available to you.’
How To Get HMRC to Approve a Business Expense Claim
‘HMRC are determined to stop expenses being claimed back where there is any element of ‘personal benefit’ to the individual claiming them back.’ Connolly explains, ‘Alternatively, the taxpayer or individual is trying to claim back as much as possible (for very practical or less benign reasons). This is where the push and pull arises from.’
So how can we ensure that HMRC will approve a business expense?
‘It’s all about minimising any element of doubt or lack of clarity as to the purpose of the original expense,’ Connolly advises, ‘which means that if and when HMRC review the details, they have as little room to manoeuvre as possible.’
He goes on to clarify that your claim should be airtight enough that ‘HMRC cannot argue that the expenses are NOT wholly, exclusively or necessarily for the business’.
The best way to achieve this is to hire an accountant to file your claim. ‘The more organised and accurate your accounting and ‘business expense’ information is, the less likely HMRC are to query it – unless there is something clearly problematic.’ Connolly states, ‘The less organised it is, the higher the chances are that they will expect or look for inaccuracies or errors, or argue something is personal or non business’.
Whether you choose to outsource your business expenses claim or handle it yourself, there are steps you can take to boost your chances of success. Here are Connolly’s top five tips for a successful business claim.
Five Tips for a Successful Business Expenses Claim
1. Have the receipt showing the exact value, date and time of the expense. This must clearly demonstrate the expense occurred during work hours or on a specific business event.
2. Have a description indicating what it was incurred for. Your knowledge and understanding of what happened must be stronger than HMRC’s suspicions – especially if you include the information at the outset.
3. Make it clear that there is NO personal element to that expense – or if there is, then identify and ensure that it has been ‘stripped out’. It’s better that you do this based on your knowledge, rather than HMRC – who will try to assume that most (or all) of it is personal.
4. If you are not self-employed: a good employer should have a detailed Expense policy that sets out what expenses can be claimed (and when). Be sure that you are clear about the details and claim back all that you are entitled to (without difficulty).
Want Some Help With That?
Knowing what you’re entitled to claim and making sure you get it is all in a day’s work for us at Addition. To find out more about how we can help, why not schedule a free call or drop us a line today?