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How expenses could affect your tax bill

When you operate a business, either as a sole trader or as a Limited company, you will usually incur expenses. These can be vital to your business, such as in the case of buying stock or renting premises, or they might be incidental, such as travel or a subscription to a trade magazine. The normal way to deal with expenses is to pay up front out of your own money and then claim them back from your company. You can do this either by making a transfer between your business and your personal account, or by writing a cheque to yourself from your business bank account.

Expenses are not taxed, so in general you will be able to deduct the amount that you have paid out in expenses from your income in order to calculate your profits. This means that if you earn £5,000 a month on your contract and have no outgoings relating to the performance of your job, you would have a total profit of £5,000 and this is the figure on which you would pay tax. However, if you had accrued expenses of £1,000 that month, then your profits would be £4,000 and this is the figure on which you would be liable for tax.

How to claim

It is vitally important to keep records of all your expenses – normally you will get receipts for your spending, but invoices, tickets and records of any online transactions you made will all help to show how the money has been spent. HM Revenue and Customs may ask to see proof of your business outgoings, so ensuring that your records are always up-to-date and kept somewhere safe is crucial.

If you have an accountant, they may help you to implement a few simple processes to help you keep on top of your paperwork, and this will also help you when it comes to completing your tax return and filing your company accounts.

What expenses can be claimed as a Limited company?

For a full and detailed list of everything you can claim for as a Limited company, HMRC have a guide which runs to around 100 pages and includes information about every possible situation and circumstance. For a simpler guide to what you can claim, the rule of thumb is that you can claim costs provided they were incurred solely and wholly in the course of your doing business.

This means that you can claim for a range of costs including:

  • The fees associated with setting up your limited company
  • Business travel (excluding parking fines or speeding tickets)
  • Telephone calls
  • Accountancy fees
  • Stationery
  • Postage
  • Subscriptions
  • Training
  • Insurance

There are some items which warrant a little more detail as there are specific rules about how and what you can claim.

Meals

You can claim the cost of meals if you are working somewhere other than your normal location, but this must be the actual cost of the food you have consumed. You cannot just claim an average sum for the number of days you are away – you need to keep detailed records of the actual costs you have incurred.

Travel

Many people who trade as Limited companies prefer to keep their travel claims simple by noting down the miles they travel and claiming them at the allowable rate which is 45p per mile for the first 10,000 miles and 25 per mile for distances after that. These figures have been calculated to allow for wear and tear on a vehicle as well as fuel costs. You can also claim 5p per mile if you travel as a passenger in a car, and can include any charges made for parking and congestion charges where applicable. If you travel by motorcycle, then you can claim 24p per mile and 20p per mile as per car journeys, and if you use public transport then you can claim back the cost of your ticket, but you would need to ensure that you keep receipts to prove these outgoings if need be.

Accommodation

Like meals, you can claim the actual cost of a hotel or bed and breakfast when you have to stay in one for the purposes of your work. There is no set amount which is allowed, but any claim you make must be reasonable so you need to bear that in mind when choosing where to stay.

Pensions

One of the biggest advantages of trading as a Limited company is being able to invest some of your income into a company pension scheme. You can offset this against the income tax that your profits would normally be subjected to as well as minimising your National Insurance Contributions. This means that you can enjoy tax relief on pensions up to 48 per cent, so for every £52 you invest, this could be topped up to £100 by the tax man.

For everything you claim on your tax return, it is important to ensure that you are able to prove that you spent the money in the first place and if you did not then it cannot be included. You cannot claim for expenses you have not incurred, and whilst your accountant may not need to see all your receipts in order to prepare your tax return, HMRC can ask to see evidence of anything you have claimed for up to six years if they decide to investigate.

If you are unsure about anything to do with expenses, your accountant will be able to clarify the rules in order to ensure you are making the most of allowable expenses and not claiming for anything that you shouldn’t be.

You may also find the following pages helpful, if you’re thinking about making the move to self employment.

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