There is a lot of confusion around which business expenses are “allowable” for tax relief and which are not. “Allowable” here means those expenses can be deducted from your turnover to reduce the amount of tax you must pay. You are also usually entitled to reclaim VAT on business expenses.
Clearly getting this right can make a big difference to your bottom line. The guidance itself from HMRC can be so vague that accountants & book keepers have to check with each other in some areas, so leave it to the experts to help you out! Nobody wants to deal with the hassle of tax claims being questioned or rejected.
For more information on what you can and cannot claim on please feel free to contact Lisa at Team4 or, if you’re feeling brave, check out HMRC’s website. If you’re looking for information on a certain type of tax claim you may find the following link helpful: http://www.hmrc.gov.uk/manuals/vitmanual/vit40000.htm.
Key points to mention:
1. Claims for clothing – many people think that clothing for their business (e.g. gym clothes for a fitness instructor) is an allowable business expense. Not true. Only very clearly protective clothing (e.g. steel toe capped boots or high viz clothing, like jackets) or a specific company uniform are allowable.
But that rule often leads to misinterpretation as, for example, HMRC says clothing used ONLY as a stage costume is allowable, but the clothes that TV presenters wear are not as these may be worn privately. So you need to ensure what you’re claiming for is accurate and acceptable. If you are unsure please contact us and we’ll be happy to give you some advice, or click on the following link to decipher for yourself: http://www.hmrc.gov.uk/manuals/vitmanual/vit43800.htm
2. Is the claim strictly for business? (Beware of ‘duality’) – expenses that have a dual business & personal purpose are not allowable expenses.* This applies to vehicle purchase, travel to a place outside your normal place(s) of work, subsistence, accommodation, clothing – really, any business expense. You must be able to show the thing is for business only to claim it as an allowable expense.
For example you can’t claim the costs of going to India for two weeks if you only happened to do two days worth of business there, whilst the rest of your time was spent vacationing, or buying a new outfit for a conference as you can also wear these for person reasons (for example, a dress that could double for a funeral or night clubbing). Only business expenses are allowable, not private ones.
*(though you may still be able to reclaim a proportion of the VAT in this case)
3. Tax on commercial vehicles – it’s tempting to classify any large vehicle used for business as a commercial vehicle as you can normally reclaim the VAT on a commercial vehicle purchase and not on a car purchase. However, a commercial vehicle is specified as having a payload of more than 1 tonne. (Payload meaning weight that can be carried so beware of modifications that increase weight of vehicle overall but actually decreases the amount that can be carried.) If it drops below 1 tonne then your vehicle is no longer commercial. So your hatchback carrying your messenger bag doesn’t count… unless you’ve got everything and the kitchen sink in there!
4. Entertainment expenses – you can put these through your profit & loss, but you can’t claim VAT back on them. If you are buying lunch for yourself while at a business meeting this is subsistence and you can claim tax relief and reclaim VAT. If you buy lunch for a client this is entertaining so you can’t claim tax relief or reclaim VAT. In this case you have to choose one or the other to claim on. Your bookkeeper can help you split out the costs, as in normal life it’s good client management (and hence good business sense!) to just take your client out for lunch rather than sit and worry about the tax implications.
5. Staff entertainment – e.g. the Xmas party. HMRC have a provision for staff entertainment that is allowable, but if you go over the threshold you have to pay VAT on the FULL AMOUNT. It pays to know how much you can spend and still claim VAT back.
£150 per person per year is allowed for staff entertainment (staff here can include partners & retired staff) but, this includes any VAT you pay in the first place. Go over this cost per person and you and your staff party will become a lot more expensive. And that is before you worry about the carnage of the morning after…
We may have just given you a lot to think about so don’t panic if you feel a headache coming on! If you have any questions about what expenses are allowable or you can and can’t claim VAT back on you can contact Lisa at Team4 who’ll be happy to offer some free advice.