As a business owner, the basic rule is you can claim any expense that is wholly and exclusively for business use. For employees, the costs must not only be wholly and exclusively for business purposes, they must also be necessarily for business purposes, which makes it harder to justify. So business owners have it fairly easy.
Typically as a small business owner there will be many things which are used both for business and personally. Common examples would be the home broadband costs, computers that the kids also use in evenings/weekends, and mobile phones.
If something has both business and personal usage, then, by definition, it is not wholly and exclusively for business purposes.
Where there is clearly a major business motive, HMRC generally accept it is fine. The technical term here is that personal usage is merely incidental.
This is very much personal choice. However, if you are happy to set some money aside for much later on in life, contributing to a pension scheme is very tax efficient. There are essentially two different ways you can contribute:
Company/employer contributions – we tend to recommend going purely with these. A couple of reasons why:
1) Higher limit. Company contributions are only limited to the annual/lifetime caps (2018/19 £40k and £1m respectively). Personal contributions are also limited to the individual’s “net relevant earnings”, which critically for small Ltd Co owners excludes dividends. Therefore often company owners would be limited to circa £8k (ie your salary).
2) Simpler. Your company puts £10k into a pension scheme for you, it reduces your company’s profit by £10k, hence reducing corporation tax accordingly. No personal tax impact on you. You therefore also don’t have to remember to tot up what your pension contributions were over the tax year come personal tax return time.
Personal/employee contributions – it is possible to make personal pension contributions from your own after tax funds. The pension scheme will gross this up for basic rate tax (ie you put in £800, they reclaim £200 from HMRC leading to £1,000 in the pension). If you’re a higher rate taxpayer, you need to remember to declare the pension on your personal tax return, where higher rate tax relief is available.
Whilst it may seem like you’re getting a lot of tax relief here, bear in mind that’s largely because it was your own personal money that had already suffered tax which you were putting in, whereas for company contributions it’s pre tax money you’re putting in.
As to how much is a good idea to put in/how it should be invested/actually setting it up, these aren’t things Maslins can assist with. As “normal” accountants we’re not FCA regulated, which means we’re not authorised or qualified to give investment advice.
General rule travel for business purposes is allowable, unless it is “normal commuting”. For permanent employees with a regular place of work, travel from home to office is considered “normal commuting” and is not allowable.
Temporary workplace where you expect to be working in a certain place for less than 24 months, travelling from home to the office becomes allowable. Note that as soon as you expect to work there for in excess of 24 months, travel from home to office is no longer an allowable expense. So if you start with a 36 month contract, no travel expenditure at all will be allowable. If you obtain an 18 month contract, travel expenditure will be allowed for the entire contract.
Contract extensions if your contract gets extended, from the moment you expect to be there in excess of 24 months, travel expenditure is no longer allowable. For example, if you originally obtain an 18 month contract, then when it ends you are given a further 12 month contract at the same location, none of the travel in the extended contract is allowable.
Other travel note that even if you work somewhere for in excess of 24 months, if you travel from the office to a client for example, that travel would be allowable.
Receipts if travelling by public transport, ensure you keep the receipts to back up your claim.
Mileage if driving a car, you can claim 45p/mile for the first 10,000 miles, and 25p/mile for any in excess of that. If travelling by bicycle, 20p per mile can be claimed, and 24p per mile for any journeys made on motorbike. You only need to keep petrol receipts if you wish to reclaim VAT on the petrol. If you are not VAT registered, or you are but you’re on the flat rate scheme, there’s no need to keep the receipts. You should keep an accurate record of mileage done to support any claim
The cost of food and drink necessarily consumed whilst on business duties is normally allowable. If your work situation requires you to eat away from home, HMRC accept this will cost you considerably more than a basic meal at home, therefore they allow you to claim these costs.
It is worth stating that you cannot deduct basic living expenses under any circumstances.
Going for a meal with your spouse is also not typically allowable, whether you discuss your business or not.
If you stay in a hotel or bed & breakfast because you are working away from home, all reasonable costs are allowable.
Whilst staying away from home, you can also claim (without receipts) a flat rate of £5 per night if staying in the UK, £10 per night if overseas.
The cost of all business calls regardless of whether on a landline or mobile are allowable. If you have a business landline or mobile where there is token personal usage, the entire cost will be allowable.
Where you subscribe to certain trade bodies, or work related magazines, these costs are allowable provided they reasonably related to the type of work you are doing. For example, it would be acceptable for an IT contractor to do a basic marketing or accountancy course to aid the running of their business. It would not be allowable if they wished to retrain as a solicitor for example.
Note that trade protection bodies such as the PCG are considered personal expenses, therefore if paid for by the company, they should be treated as a benefit in kind.
These are allowable provided they are incurred on the business bank account, or relate to business borrowing.
Professional indemnity insurance, employers liability insurance, business content insurance, and any other entirely business related insurances are allowable.
Typically the cost of computers themselves will be capital, however with the current Annual Investment Allowance, unless you spend more than £50,000 on qualifying capital expenditure within a financial year, the entire amount is deducted from your trading profit in the year of purchase (ie the entire cost is effectively allowable, although it will go in a different place in the accounts and tax returns).
Running costs, such as printer cartridges, software licences, broadband, website hosting etc are all allowable.
The rules for this are in transition at the moment, so be aware there will be mixed information around. The old childcare voucher schemes are on their way out (though the deadline has been put back several times).
The new system works more like gift aid, in that (provided you meet the criteria), if the childcare costs £1,000, you pay £800, and the childcare provider reclaims the balancing £200 cost from HMRC.
We’d suggest if this is an area of interest for you, best people to discuss it with are the childcare provider firms themselves.
For the majority of Ltd Co owners, we tend to recommend sticking with the nice and simple £4/week HMRC allow you to claim without any complex calculations, evidence, or additional disclosures required.
Client entertainment of any kind is not allowable for tax. Yes it may be wholly and exclusively for business purposes, but HMRC consider it to be borderline bribery, and therefore do not want to encourage it. It also tends to benefit specific individuals in a way that they are not taxed.
Client entertaining includes any food or drink, along with other things more obvious of a hospitality nature.
Gifts to clients are also generally not allowable. In particular if they are food, drink, or tobacco they are always disallowable.
Gifts are allowable if the total cost is less than £50 per client, they do not fit into one of the categories above, and they bear your business name/logo.
Staff entertaining – unlike client entertaining, this is allowable for corporation tax. However you need to ensure the total cost, including possible extras like travel to/from, accommodation if staying overnight etc, is no more than £150/head. Otherwise the whole amount (not just the excess over £150) will be a taxable benefit in kind on the individual concerned. In reality this means you can take yourself and significant other out for a nice meal once a year.
From 2017/18 there’s a new exemption for “trivial benefits”, typically for staff. These need to be no more than £50, and something which can’t be converted into cash. We imagine the spirit of the law for these is so staff can be given a nice bottle of wine/box of chocolates/bouquet of flowers/modest value gift card on their birthday/similar, with the company paying for it and no tax issues for the recipient.
Directors can still claim this, but are limited to no more than £300 in total per year. As with the £150/head for staff entertaining, if you go above this amount, the whole amount (not just the excess) is a taxable benefit in kind. Given the directors are likely to be the ones controlling the purse strings, our view is that this is potentially there to legitimise the inevitable occasional time a business owner mistakenly uses their company debit card to buy something personal and modest in value. Some accountants are recommending that all client companies buy 6 x £50 gift vouchers for their directors each year. If you wish to do this, by all means do, it’ll save you a whopping £57 in corporation tax at current rates…but be aware you’re taking the full limit, so you need to be very careful you don’t slip up elsewhere.
Of course, these are allowable in the vast majority of cases. We will let you know if any work we are likely to do is not allowable, as for some less common scenarios they may not be.
Be wary of umbrella companies bragging about huge dispensations. Some disreputable firms try to tell you you can claim £50, £100, or even more, per day, with no receipts required whatsoever.
Dispensations actually mean the umbrella can repay expenses to you without them needing to see receipts and fill in a P11d for you. You still need to keep receipts to backup your claims. If you have claimed a flat rate amount without a receipt, and you get caught, it will be you that gets clobbered by HMRC. Umbrella companies tend to keep quiet about this.