Posted on 1 August, 2018 | 4 mins
Every business will have expenses they can claim against to reduce their tax bill. But complexity can cause mistakes. So, to help clear things up, we invited guest blogger Pawel Piejko from Arbitrue to give us some expert tips around which expenses are tax-deductible and which aren't.
Small businesses in the UK have tried to put some outlandish things on their expense claims. According to HMRC1, some of the worst attempts include holiday flights to the Caribbean, pet food for a Shih Tzu ‘guard dog’ and luxury watches as employee gifts claimed by a company... with no employees.
Overall, one in four UK employees submit false expense claims2, while travel expense fraud alone may cost US businesses around £1.5 billion annually3.
Many companies may not want to make such false claims; they might simply be confused by which small business expenses are allowable. So, having a better understanding of how claiming business expenses works is of utmost importance for all business owners.
After all, claiming tax-deductible expenses is an important way to reduce your tax bill. To give you a better idea, here are some of the most typical expense categories.
1. Travel expenses
Given that business travel is common in most companies, the travel-related category is a vast expense source that is sometimes rejected as fraudulent.
Travel expenses are acceptable as long as the purpose of the travel is “wholly and exclusively” related to the business. If some travel costs are dual-purpose, they’re allowable as long as it’s possible to calculate the proportion of business vs personal use.
This category of expenses covers various modes of transportation (plane, train or bus tickets), petrol station receipts, road tolls, parking tickets and subsistence, which is a single basket for meals and other essential travel costs.
Example expenses: plane tickets, road tolls, parking tickets, petrol station receipts.
Watch out for: travelling for both leisure and business purposes.
2. Office expenses
All business owners—including limited companies, self-employed, freelancers, and craftsmen— need a physical space for their business. Regardless of whether it’s owned or rented, the office space is a typical source of business expenses. Some examples include rent and utility bills, internet bills, fixed-line telephone, office furniture or an office insurance policy.
It happens that business premises double as the business owner’s home. In this case, it may be possible to claim expenses based on a flat rate available for the UK-based businesses.
Example expenses: office rent, co-working desk, ISP bills, phone bills.
Watch out for: dual-purpose utility bills where you can’t calculate the share of business vs personal use.
All businesses need computers, including laptops or even smartphones and accessories. Many also use TV screens or projectors for giving business presentations. Even if the nature of the business is selling physical goods in a bricks-and-mortar location, you may need certain electronic goods to contact your clients, use cloud accounting services or keep track of expense-related documents—all of which can generally be expensed.
Example expenses: laptop, mouse, keyboard, speakers, smartphone, projector, printer, scanner.
Watch out for: consumer electronics for which leisure use is more common than business use (e.g. gaming consoles, TVs).
4. Advertising, marketing, education
Business purchases related to advertising and marketing products and services that the company sells is an allowable expense, even if campaigns are unsuccessful regarding generating new sales. Similarly, you can claim expenses related to business courses, industry meetups and conferences that are exclusively related to the trade.
Example expenses: AdWords, Facebook Ads, Twitter Ads, web design, copywriting, internet domain.
Watch out for: spending ad budgets on campaigns unrelated to your business, courses and training unrelated to your business.
5. Bonus: Expenses without a receipt
To claim business expenses, you need evidence showing all the details of your transactions, including the amount, seller’s details, date and description. In most cases, invoices, receipts, and bank account or credit card statements are sufficient.
Bear in mind that sometimes it is possible to claim expenses even when you don’t have any documentation. This is possible in the case of flat-rate-based expenses, such as car mileage or costs related to living at your business premises. Another interesting option is reclaiming VAT on items under £25 which is also possible without a VAT invoice.
Example expenses: car mileage, work from home, VAT claimed on items under £25.
Watch out for: flat-rate expenses may not be the most tax-efficient.
Pawel Piejko is a Marketing Manager at Arbitrue—an invoice data extraction tool that integrates with bookkeeping software, like QuickBooks, to dramatically speed up data entry for small businesses.