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 relatively easy.
Duality of purpose
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.
Contributing to a pension scheme is very tax efficient. There are 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 (2019/20 £40k and £1.03m respectively). Personal contributions are also limited to the individual’s “net relevant earnings”. Critically for small Ltd Co owners these exclude dividends. Therefore often company owners would be limited to circa £8k (ie your salary).
2) Simpler. Say 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 if 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 it was your own “post tax” personal money that you were putting in. For company contributions it’s “pre tax” money you’re putting in. The overall tax impact is broadly the same, just simpler for the company contributions.
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. It’s 24p per mile for any journeys made on motorbike. These amounts are on the basis you pay for all the running costs (fuel, insurance, servicing etc) from your own after tax funds. 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 family/friends 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.
Bank charges and interest
These are allowable provided they are incurred on the business bank account, or relate to business borrowing.
Professional indemnity insurance and any other entirely business related insurances are allowable. Whilst there are lots of insurance providers on the market, QDOS are a strong option for the contractor market. We are able to get Maslins clients a 10% discount off their rates.
Typically the cost of computers themselves will be capital (ie will go on the balance sheet as a fixed asset, rather than through the P&L as an expense). However with the Annual Investment Allowance, realistically any client of Maslins is going to be able to claim 100% tax relief for any/all such purchases in the year of purchase. Ie the entire cost is effectively allowable for corporation tax, 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 have fairly recently changed, so be aware you may see some articles re “childcare voucher schemes”, which are potentially out of date.
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.
Use of home as an office
For the majority of Ltd Co owners, we tend to recommend sticking with £26/month (recently increased from £18/month). HMRC allow this without complex calculations, evidence, or additional disclosures.
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 (a mild form of) bribery. They therefore don’t want to encourage it. It also tends to benefit specific individuals in a way that they are not taxed.
For these purposes, “client” also includes “potential clients”, “ex clients” etc.
Client entertaining includes any food or drink, along with other things of a hospitality nature.
Gifts to clients are generally not allowable. In particular if they are food, drink, or tobacco they are always disallowable.
Gifts to clients are allowable only if:
– the total cost is less than £50 per client per year, and
– they do not fit into one of the categories above, and
– they bear your business name/logo.
Hence some companies will give away branded T-shirts, pens, USB keys etc.
Unlike client entertaining, the cost of an annual staff party is allowable for corporation tax. However we recommend you keep the total cost below £150/head. This includes possible extras like travel to/from, accommodation if staying overnight etc. Otherwise the whole amount (not just the excess over £150) becomes a taxable benefit in kind on the individual(s) concerned. In practice this means you can take your significant other out for a nice meal annually.
From 2017/18 there’s a new exemption for “trivial benefits”. These need to be no more than £50, and can’t be converted into cash. We imagine spirit of the law is so staff can be given a nice bottle of wine/chocolates/flowers on their birthday/similar. The company can pay for it, 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. Some accountants are recommending that all client companies buy 6 x £50 gift vouchers for their directors each year. Do be aware you’re taking the full limit, so be careful you don’t slip up elsewhere. Whilst we don’t object to this, our view is that it could otherwise be a handy “get out” for those times a client inadvertently used the company card for a modest personal cost.
These are allowable in the vast majority of cases.