Introduction
For a smaller company, cash flow is everything. According to business finance experts Fundera, 82 percent of small businesses fail because of an imbalance on the books.
Expenses play a major part in the cash flow equation, and they have the potential to leave you with a significant chunk of change at the end of each financial year. Despite this, £962 million worth of expenses were not offset by businesses in the UK last year.
With hundreds of millions of pounds on the line, understanding small business expenses is an imperative. It could mean the difference between keeping the doors open and being forced to close.
Here’s our guide to the basics, which will ensure that you don’t miss out on the refunds you’re eligible for.
What are small business expenses?
Approximately 60 percent of UK employees didn’t claim any expenses in 2018. It’s important, then, to be as clear as possible about what they are and when they might arise.
A small business expense – or any kind of business expense, for that matter, is defined by Investopedia as:
‘…costs incurred in the ordinary course of business…expenses are subtracted from revenue to arrive at a business’s taxable net income. [They] may also be referred to as deductions.’
In short, small business expenses are costs that you don’t have to pay tax on. They’re deducted before your business is taxed by the government, and they aren’t considered part of your taxable profit. In real terms, this means that if you go through the trouble to record and claim them, you’ll have more money in your pocket.
If you’re a new company, chances are you’ll be operating at a loss for a few years. If this is the case, you won’t have any taxable profit. It’s possible to offset your losses against future tax payments, though.
For example: if you’ve made a loss of £25,000 in your first year but make a profit of £30,000 in your second, you’d only have £5,000 of taxable profit to worry about.
For a more in-depth guide to offsetting your losses, take a look at this guide from HMRC.
The different kinds of expenses
Simple enough so far, right?
Let’s dig a little deeper. There are two different kinds of expenses, but don’t let this put you off – there’s a clear distinction.
Deductible expenses
A cost is valid for deduction if, in the eyes of HMRC, the business expense is:
‘necessary…wholly and exclusively incurred as part of the day-to-day running of your business.’
This means that you can only claim an expense successfully if it costs you money as a direct result of your business’s requirements. There are some exceptions to be made when it comes to costs that have an impact outside of the office or for home-based workers, which we will explain later in this guide.
Non-deductible/disallowable expenses
Unfortunately, not everything is tax-free. As a general rule, anything that doesn’t pertain directly to the operation of the business can’t be fully deducted and must be included in your corporation tax. Again, if it’s an expense that is directly incurred as a result of operations and it benefits you at home, there’s a separate rule.
Notable examples of disallowable expenses include things like client entertainment, personal expenses and charitable donations (the latter has to be deducted using Gift Aid).
Bonus category: Simplified expenses
If you’re self-employed, your business costs for vehicles, working and living at home can be claimed using flat rates – predetermined deductible rates that make calculations quicker and easier. As the name suggests, it’s a simpler way to manage these kinds of claims, so may save you some time and money.
Check out HMRC’s advice on the subject here.
What expenses can I claim as a small business?
As a small business, you’re entitled to many of the same expense claims as larger corporations – as long as you can prove they’re valid to HMRC. There are countless small business expenses that will be unique to your industry, but they broadly fall into the following categories:
- Items for the office
- Utilities
- Business travel
- Personal development
- Entertainment
- Agency fees
Why bother mentioning these broad categories? Well, organisation is a major factor when it comes to making the most of your expense claims. In fact, of the 60 percent of UK employees who didn’t file claims last year, 33 percent said that it was because they’d lost the receipt they needed.
Creating a system for organisation – or adopting an automated tool to do it for you – means you’ll be less likely to misplace the records that make a claim possible. Once a cost is incurred, you’ll know exactly where to store the proof of purchase.
It’s also worth noting that HMRC requires receipts to be held for a minimum of five years, so keeping a digital and physical version is useful.
With that out of the way, let’s take a closer look at each category, and the things that qualify as deductible expenses.
Equipment and items for the office
If your business operates from an office, chances are you’ll need to stock it with stationery. It might seem like it’s not worth the time investment, but stationery costs add up over the years. As a small business, you’ll want to be making savings wherever you can. It’s a classic example of a deductible expense.
The same goes for any equipment that you need to do your job. If you’re operating a call centre, for example, phones and headsets will likely be considered tax-deductible. As per the definition mentioned above, anything that is necessary for the day-to-day running of your business counts as a deductible.
It’s not worth testing the limits of this, though – HMRC will follow up on anything that doesn’t seem essential, so it’s better not to try and game the system.
Computers present a trickier situation. If you’re looking to provide laptops or desktops for yourself or for employees, you’ll have to ensure that they’re used solely in the service of the business, or you won’t be able to claim the full expense for deduction.
If the computers will also be used at home, you’ll need to work out the proportion of use at work and at home – the ‘work’ part is the amount that is deductible, and the remainder is included in your final tax bill. This system doesn’t just apply to equipment, either. Depending on your situation, utilities may need the same treatment.
For more on equipment expenses, here’s the government’s page on the subject.
Utilities
Rent, heating, water, electricity and the internet all cost money. If you’re in an office, this category is pretty straightforward – they’re valid deductions, and will likely save you a significant amount of money year-on-year.
If you’re working from home, however, it’s less cut-and-dry. It’s another matter of proportions, and you’ll need to calculate the amount of time you’re making use of utilities for work versus personal use. As with equipment expenses, it’s better to make a conservative estimate, because HMRC can investigate any claim at any time.
For more on claiming expenses as a home-worker, check out the government’s advice here.
Business travel
Commuting
Travel expenses may be the most common expense category of the lot, so it’s important to get them right. First and foremost, keep this advice from HMRC in mind:
‘You cannot claim for travelling to and from work, unless you’re travelling to a temporary place of work.’
That’s a straightforward rule, so they won’t look kindly on anyone flouting it. What constitutes a ‘temporary place of work’, though? In the government’s eyes, it’s somewhere that you’re travelling to for two years or less.
If your contract requires that you be somewhere for less than 24 months, you can claim the travel expenses. There’s a caveat, though. As soon as you know that you’ll be there for more than two years, you have to stop claiming expenses. InniAccounts offers an easy-to-understand example of this situation:
‘If you start with a 12-month contract and you secure another 12-month contract with that client, you must stop claiming expenses at 12 months.’
If you meet the criteria to claim travel costs, there’s a simple system in place thanks to HMRC’s fixed mileage rates. Travelling by car? They’ll allow 45p per mile for the first 10,000 miles, and 25p per mile after that.
For the full rates – including those for bike travel, which is also deductible – check out their page on the subject here.
Accommodation and food
Both hotels and meals can also be claimed, as long as both are ‘reasonable’. That’s a little vague, so you’ll have to use some intuition when it comes to these costs. As a general rule, avoid ritzy hotels and Michelin-starred restaurants!
Like utility costs, you’ll have to calculate the proportion of the costs that went towards the business if it’s a trip that combines work and leisure.
For the government’s page on travel expenses, click here.
Professional development
HMRC recognises that professional development is often a necessary cost, especially for small business looking to evolve. For this reason, they consider money spent on training, industry publication subscriptions and membership of professional bodies to be a deductible expense, as long as you can prove their necessity. Travel to and from training facilities are also considered deductible. Note that the cost of lifetime memberships and subscriptions are disallowable expenses, though.
You’ll have a far easier time of claiming expenses for membership of professional bodies if they’re on HMRC’s list of ‘approved professional organisations’, which you can find here.
For the government’s advice on professional development expenses, click here.
Entertainment
You might be surprised to see the ‘entertainment’ category represented here, considering ‘client entertainment’ was on our list of disallowable expense examples. This rule, however, doesn’t apply to entertaining your own employees (as long as you’re not a sole trader).
This can include any kind of employee entertainment as long as it meets the following criteria:
- The cost of the entertainment is less than £150 per person over the financial year.
- The entertainment is equally accessible to every employee in the business.
Whether you spend it all on one blowout event or several smaller parties throughout the year, HMRC is happy for you to have tax-free fun at work.
For more advice on claiming employee entertainment expenses, check out this helpful article from Crunch.
Agency fees
Legal and accountancy costs will invariably mount up if you’re operating any kind of business. If you employ professionals to take care of it for you, you can pay them tax-free.
Interestingly, the same goes for marketing agencies. The fees you pay them are tax-deductible, making it easier for you to advertise your business or build a professional website. If you’re handling marketing on your own, the government’s website says that you can claim for ‘advertising in newspapers and directories’, ‘bulk mail advertising’ and ‘website costs’, so you’re covered there, too.
For the government’s page on claiming marketing expenses, click here. For their page on legal and financial fees, click here.
The art of automating expenses
Hopefully you’ve now got a better idea of the business expenses that can be deducted from your end-of-year tax payment. It’s a lot to remember, and a potential mountain of receipts to manage and retain. That’s where automation comes in.
Keeping digital versions of all of your records in one place is a convenient and efficient means of ensuring your accounts are in order. Some expense-management software will allow you to dive even deeper into claims, letting you set budgets, create lists of approved vendors and manage expense requests from employees in real time. The benefit? You’ve got a full overview of where your business’s money is going, and you can ensure that the costs incurred are deductible at the end of the financial year.
If you’re part of a small business, expenses can have a huge impact. Removing the busy-work of expense management and guaranteeing that your records are securely stored and organised can free you to manage cash flow in other areas of the business. The truth is, if you can get expenses right, you’ll be left with more money in the bank, and that’s just good business.
