Business owners have any number of costs to deal with, all of which eat away at profitability. But fortunately a great many expenses can be set off against corporation tax, thus reducing HMRC’s take. By keeping careful records and knowing their allowances, many bosses can lop thousands off their tax bill. This helpful guide will make sure you are one of them.
As a general rule, if the expenditure is necessary for the running of the business then in all likelihood it will be claimable. To use HMRC’s phrase the expense must be ‘wholly, exclusively and necessary’ for the business. The cost of the expense is deducted from the company’s profits, reducing the amount of corporation tax that is payable. Unfortunately, there is no equivalent of the personal allowance – tax is paid on all profits, with the rate starting at 19%.
What expenses are tax deductible?
First the big ones. You can claim for all the major expenses of running a business including business rent and rates; wages or salaries for staff; utility bills for the company’s premises;
non-capital expenditure on equipment, including computers, software and peripherals; and stock and raw materials. Also the costs of setting up the business are tax deductible.
Use of home
Where the business premises is also a home you can claim for the share of utility costs used by the business. This requires quite a bit of figuring out as the claim is based on the number of rooms used by the business, the proportion of household costs spent on the business, eg, electricity and heating, and the amount of time the business parts of the home are in use in that capacity. Rent and mortgage costs are not claimable as you would be paying them anyway. If that is all too complicated you can claim flat rate tax relief of £6 a week without having to provide any proof of expenditure.
Professional development
If you’ve started to feel your skills need a boost you will be relieved to know professional development courses are tax deductible. Just make sure the course is relevant to your work.
Finance, legal, admin and marketing
Other claimable expenses include advertising and marketing; corporate accountancy fees; legal fees (as long as they are revenue expenses, say, ones relating to a trade dispute), office costs such as telephone line rental and broadband, mobile costs where the contract is with the company; and financial costs such as bank charges and insurance premiums.
Travel and food expenses
Work-related travel costs (but not commuting) are tax deductible. Employee expenses such as hotel or meal costs when away on business are claimable although they should be reasonable and not excessive. Make sure the employee comes back to the office with receipts.
Lunch at the office is not claimable. Although obviously no one can work without sustenance, HMRC’s view is that you would be eating lunch anyway. However, if you are out of the office for more than five working hours it becomes claimable and dinner does too if you are out of the office for more than 10 hours.
Taxis can be claimed for but usage should be reasonable, as can use of public transport, as long as it is not used for commuting.
The costs of driving for work can be claimed at these rates:
- Car and vans – 45p a mile for the first 10,000 miles and then 25p for every mile there after;
- Motorcyclists – 24p a mile;
- Bicycle – 20p a mile.
On top of this you can claim for parking costs and fuel, and any repairs or servicing needed.
Employee costs
As well as staff’s pay, their bonuses, pensions, company benefits and uniforms are tax deductible, as is employer’s national insurance and the cost of training courses. Bear in mind the last of these must directly relate to the business –an MBA, say, for the chief executive may well not be claimable as it willdevelop new skills rather than build on existing ones, and is unlikely to be necessary for the running of the business.
Staff
Gifts (‘trivial benefits’ in HMRC parlance) for staff worth up to £50 are tax free but cannot be cash or vouchers. You can give staff more than one gift each a year tax free but a gift that is worth more than £50 loses all tax relief on the whole sum not just the part above £50. The gift must not be a reward for work or performance-related and must not be contractual.
Entertaining staff is claimable, subject to some rules. Up to £150 a year a head can be claimed for office parties and works outings including guests who must not be customers or clients but the event must be annual and open to all staff. The £150 figure can be sub-divided so it’s perfectly all right to hold, say, two staff dinners a year, each costing no more than £75 a head.
Business expenses that are not allowable
Non-claimable expenses will be those that fall the other side of the line from those that are essential for the business.
Capital assets
The cost of capital assets, even if necessary for the business, are not tax deductible; however, they do qualify for capital allowances. The annual investment allowance lets companies spend up to £1 million a year on assets and deduct that cost from their taxable profits.
You can’t claim for the cost of improving assets although you can claim for repairs. You also can’t claim for depreciation.
Non-revenue legal costs
Legal costs relating to things like buying a business property or renewing a lease are not tax deductible as they are capital expenditure.
Fines and penalties
While a delivery firm may see parking or speeding fines as an inevitable cost of doing business, HMRC does not since incurring fines and penalties are not necessary for the running of a company.
Dividends
Dividend payouts, which may form a major part of a director’s income, are treated differently from salary costs and are not tax deductible.
Client entertaining
Wining and dining clients and potential clients, however much that could be argued as an investment in the business, is not seen as a necessary expense by HMRC so is not claimable.
Furthermore, gifts to clients and customers are not tax deductible above £50 and even below that figure the gifts cannot be food, alcohol, tobacco or carry advertisements for the business.
Childcare
Even if you need childcare in order to work you cannot claim for it.
And finally
Make sure you keep records of anything you want to claim for, whether on paper or digitally. A straightforward way of doing this is to use a spreadsheet and update it regularly so you don’t lose track of some of your expenses. And don’t forget that claims that aren’t supported up risk being rejected by HMRC. Documents should be retained for six years after the end of the tax year they relate to, and in some special cases even longer.
HMRC’s CT600 form for filing corporation tax returns is complicated and most company owners use a firm of accountants to complete it on their behalf. Accounts will also need to be sent to Companies House. But, don’t forget, accountancy fees are a tax-deductible expense.
Finsbury Robinson will be happy to help you get your business running in the most tax efficient way. Please give our friendly team a call on 020 8858 4303 or email us at info@finsburyrobinson.co.uk
