I was put in a difficult position by a client recently. I was helping them with their self assessment tax return, and was being pressured to include a couple of expenses that I did not consider to be legitimate business costs.
Within reason, and subject to some legal exceptions, a business is allowed to incur a wide range of expenses in the furtherance of its objectives. When you are self employed, or a sole trader, the onus of responsibility is the other way round – the basic assumption is that all expenditure is personal, unless you can demonstrate that it is business related.
In particular, I was being asked to include two items of significant value as business expenses, based on their presence on a credit card statement and the client’s insistence that they were business related. Bearing in mind that I had already had to consider whether towels and a set of weighing scales could be included, I felt the lack of any appropriate or independent evidence of the two items, such as a copy of the invoice and the fact the two large expenses were bought in the previous accounting period, I decided that, in my professional judgement, I would not allow them. This did not please my client.
Accounting is often considered an exact science. In my view, it is an art. Its purpose is to paint a true and fair picture of what has happened, in a way that makes sense to the person looking at the information.
It is the responsibility of whoever is putting the accounts together to ensure that there is appropriate evidence to support their view. Of course, what you might want to see may vary depending on whether you are the business or the tax man.
Back in December 2010 I wrote about claiming expenses from your business relating to the business miles you drive (http://bit.ly/gh1s0t ).
Unless you drive in excess of 20,000 miles a year, you will be far better off claiming for each mile you drive, than to try and take a tax hit, or claim a percentage of your direct costs.
You may recall that, in the recent budget, the rate you can claim for the first 10,000 miles has increased from 40p to 45p. This gives you a potential extra £500 per year to claim.
If you use your own car for business purposes, you should be claiming expenses to offset the costs that you are incurring. As well as the fuel you use, you are allowed to claim for running costs such as repairs and maintenance, MOT, tax and insurance.
It doesn’t matter of you are self employed, or working for a company, as long as the miles you travel are for the business, and are not personal. The exception to this is your regular commute. You cannot claim for the miles driven to and from work, if you work at the same place most days. However, trips to the post office to buy stamps, to visit clients or suppliers, to visit business partners, or attend meetings are all allowable.
You may not know this, but you can also claim reimbursement if you use a bicycle to get around for business. A few years ago, the government introduced a mileage rate if you use your bicycle for business. A great way to stay fit, help the environment, and claim a tax deductible expense!
If you are VAT registered, you will need to collect VAT receipts for your fuel (not necessarily for the actual fuel you use), ensuring that the receipts are dated within your claim period.
I have created a very simple spreadsheet to help you calculate how much you can reclaim as expenses if you use your own car (or bicycle!). If you would like a free copy, please call or email me, and I’ll let you have a free copy.
This seems like a simple question. However, particularly at this time of year as they submit their tax return, many people find out that what they thought was a business expenses, isn’t.
The answer to the question is not defined by you, but by the tax office.
Take your telephone bill as an example. The tax office is happy to accept a telephone bill, even a mobile phone bill, as a business expense if you are a limited company, but not if you are self employed. If you are self employed and have a mobile phone, the tax man will assume that the contract is mainly for personal use. To prove your business use you need an itemised phone bill and details of which calls were for business, and which were personal.
Another area that often causes confusion is food and drinks (entertaining). Meals and drinks bought by a limited company can usually be called a business expense, but only very rarely if you are self employed.
If you are unsure about what is or isn’t a business expense, ask a professional, and then make sure that you understand what they tell you. I heard a story recently about someone who thought they knew what was allowed, only to find that their accountant had disallowed some items on their tax return (and not told them).
The logic behind the tax office’s decision on what is (and isn’t) a business expense may be archaic or confusing, but when the tax man knocks on your door and asks to see your accounts, the argument becomes irrelevant, as all that matters is the law.
If you would like to know more, or have questions, please ask.
Talking over the MP expenses story with some friends, there seem to be two issues:
The rules for reclaiming expenses, and
The administration of the rules.
I believe that the rules are probably about right, possibly a bit generous, but basically right. The governing document makes it very clear what should, and should not, be claimed, and why.
However, I have major issues with the way in the rules were administered. Greed and maladministration have allowed MP’s to claim for items that do not fall within the rules they themselves set. Quite clearly, not only did some MP’s break their own rules, but the laws of the land as well.
This is not a modern problem, in AD130 Juvenal wrote, “Sed quis custodiet ipsos Custodes?” (But who will guard the guards themselves?).
There is no perfect system. But there is a compelling case for better independent scrutiny.