Whether you’re a sole trader, a partnership or a limited company, you may be paying more tax than you need to, and you won’t be alone.
Many business owners don‘t realise that the expenses they can claim against income go beyond rent, rates, equipment, marketing, insurance and salaries. How about food, holidays and school fees?
To help find out if you could cut your tax bill, we’ve asked Jonathan Amponsah of the The Tax Guys to explain more about some of the less well known business expenses you can claim.
How to claim a lunch and other food expenses
Let’s start with food.
In general, HM Revenue & Customs say no to entertainment expenses. However, in certain circumstances this can become allowable.
For example, someone working as a freelance journalist may seek out an expert to provide insight into a particular topic, and offer to buy the expert lunch while they discuss the relevant issues.
The expert is providing something of value, and as their only benefit is the lunch, that lunch can be claimed as a legitimate expense by the journalist.
Another situation where the cost of food becomes a permitted expense is if your business actually requires you to entertain.
An example of this would be running training courses where tea, coffee and lunch is supplied. The cost can be claimed because you are under a contractual obligation to provide food.
Another entertainment allowance frequently overlooked is staff entertainment. Regardless of the nature of your business, £150 a year, per head can be claimed for staff entertainment. And this can be claimed even if it’s just you, as a director, because you are classed as an employee.
Business trips and holidays
Here’s what you cannot claim: turning a holiday into a business trip.
It doesn’t matter what fantastic opportunity comes your way, the purpose of your trip is personal, and that means you’ve waived the right to claim any expenses.
But what about turning a business trip into a holiday? As long as you’re careful to separate the various costs, there are ways of bumping up the fun you can have while traveling on business.
Let’s imagine you have a number of business meetings in Vienna. You fly to Austria on Monday afternoon, allowing you to be rested for your first meeting early Tuesday morning. You have a second meeting later that morning, and another on Wednesday afternoon.
Your return flight is on Thursday morning. The primary purpose of the trip is clearly business — this is important. Make sure you keep proper records, notes and board minutes to document the main reason for the trip.
While your flights and accommodation are allowable expenses, a tour of the Spanish Riding School on Tuesday afternoon is not.
You are allowed to do non-business things during your business trip – they are incidental benefits of the main business purpose – you just can’t claim for them.
As you have a fair bit of spare time during your trip to Vienna, perhaps you’d like to invite your spouse to go to Austria with you. And that is fine. You just need to remember that non-business related costs cannot be claimed.
So, for example, your flights can be claimed for, but your spouse’s flights cannot. Once again, seeing the Lipizzaners can’t be claimed, and neither can the tickets for the Opera on Wednesday evening.
If your spouse has always wanted to see nearby Bratislava, but you don’t have time between meetings to make the journey to the Slovakian capital, you can extend your stay in Vienna by a couple of days, allowing you to book a boat trip down the Danube on Wednesday morning, and return by train in the evening.
Adding personal time to a business trip is perfectly fine, as long as you separate the non-business expenses, which will include the additional accommodation and activity costs involved in adding days to your trip.
Providing holiday vouchers to employees
There are also ways to be tax efficient with your employees’ holidays if you run your business through a limited company rather than as a sole trader or partnership. And remember, as a director, you are an employee.
There are various benefits and drawbacks to the two main business structures; a sole trader (self employed) and operating as a limited company. To help you understand the various pros and cons, and to work out which is best for you, read;
HMRC allows claims against vouchers given to staff to exchange for holidays. The cost must be reported as a staff benefit, much like medical benefits or a company car.
Here’s how it works:
As a director, your company pays for your holiday, which is reported as a benefit, and it pays Class 1 National Insurance on the cost. You, as an employee pay tax on the benefit, and the company can claim the cost of this benefit against its income, thus reducing the amount of corporation tax it would need to pay.
Additionally, by providing these holiday vouchers the company reduces its salary costs – it would pay higher tax if the cost of the holiday went through payroll.
Claiming for club memberships and school fees
The same principle applies to leisure activities such as golf club fees and gym memberships, and to care home fees and school fees.
For example, the directors of a company can decide to contract with a tuition provider to pay the school fees as part of their remuneration.
This becomes a benefit in kind with some taxes paid but crucially no employees National Insurance. HMRC details this more fully here.
Business training can also be an allowable expense. Training can be provided to employees (including directors) tax free. However, this training must be work related. Non-work related training falls under the benefits in kind tax code.
If you are self-employed, you need to be careful with training. If you attend a course that will provide you with new expertise, knowledge or skills, which you lack, you cannot claim this against tax. This is not allowed because it is treated as capital expenditure.
However, if you are merely updating expertise that you already possess, this can be regarded as revenue expenditure, which is a permitted expense.
The key thing to keep in mind when considering claiming for expenses that have a personal element to them is that HMRC allows expenses that are incurred wholly and exclusively for the purpose of your business.
It may be confusing what wholly and exclusively means, but you can seek advice from a tax adviser, an accountant, or from HMRC, which has, as part of its website, a helpful guide under their expenses and benefits section.
And remember, make sure you get the paperwork and evidence right.
About the author
This guide has been written exclusively for ByteStart by Jonathan Amponsah CTA FCCA, an award-winning chartered tax adviser and accountant who has advised many clients over the last decade on tax deductible expenses. Jonathan is the founder and CEO of The Tax Guys. He is also the co-founder of Easy Tax Returns (a tax return app to help tax payers avoid stress, penalties and find their peace).
Business accounts – Further resources
For more tips and help on dealing with your business accounts, try these other ByteStart guides;
- A Guide to Bookkeeping for new business owners
- Setting up accounts for a sole trader – A beginner’s guide
- Book-keeping basics every new business owner must know
- How switching from spreadsheets to cloud accounting can help small business owners
More from ByteStart
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- 10 common Self-Assessment Tax Return mistakes and how to avoid them
- Sole trader tax – a guide for start-ups and the newly self employed
- 10 ways small business owners can pay less tax
- Corporation Tax – How to reduce your bill
- Capital Allowances – A review of the various schemes businesses can use to cut their tax bills
- 5 Things you must do when you go self employed
- How to set up a limited company
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Funding your business
- Asset Finance – A Guide for small business owners
- A Guide to ‘Alternative Finance’ – the new funding options for startups and small businesses
- Finding finance for your new business – funding advice for start-ups
- Invoice Finance – What is it and how can it help my business?
- Revolving credit facility – The short term funding solution every small business owner should know about