Nothing is quite so misunderstood as business expenses. Writing something off as an expense has a nice ring to it, but the reality of what that means still takes people by surprise.
One of the most common misconceptions about business expenses is that you get money back…from… somewhere.
This is a dangerous way of thinking, as it often leads to business owners splashing out on purchases they might not need, or can even afford! The truth is that you won’t receive any money back from the government. However, while you won’t benefit from any cash, you will save some money on your tax bill.
How business expenses work
If you’re new to the whole world of business expenses, we’re here to help. When it comes to owing tax as a business, you are charged based on profit figures. You’re charged on money you make as a business, not money you have in your business and this is an important distinction to make.
In other words, any money you earn should have expenses removed from it in order for you to calculate your actual profit figures. This means that when HMRC calculates your tax bill, they will be going off profits, rather than your total income.
Income – expenses = profit
For example, if you charge someone £100 for a service, but you spend £10 in order to deliver that service, then you only made £90 profit. Therefore, you should only pay tax on £90 and not the full £100.
In this example, if you’re subject to the basic tax rate, you would save 20% tax of £10, which would be a saving of £2. Applying this to all your expenses can add up to some hefty savings that can really reduce your tax bill.
What can you actually claim for?
Another common misconception around business expenses is that you can claim for anything. Every year without fail, accountants and HMRC see some of the most bizarre expense claims from businesses who think they can write anything off.
All your business expenses must be – you guessed it – expenses of the business. In other words, they must be things bought directly for the purpose of conducting business. Examples of acceptable expenses include staffing costs, training costs, outsourcing (e.g. to an accountant), stock and office supplies.
Examples of things you can’t claim for might include car running costs (unless you need it for the business), rent, food for yourself, clothing, personal tech and so on. Of course, if you can prove that any of these things are necessary to the business, then that’s fair enough. However, if it’s something you’ll struggle to convince HMRC of, then it’s probably not a real expense.
If you are unsure about what you can and can’t claim for, you wouldn’t be the first. Things like fuel costs can be a bit tricky because it depends on how you’re using the fuel.
You can take a look at the government’s website for a list of things you might be able to claim for.
The consequences of getting it wrong
Falsely claiming for expenses is tax fraud and evasion. This is something that HMRC does not take lightly. You could be fined or even get a criminal record in some cases. It’s not worth the risk!
As with anything finance or tax-related, if you’re unsure, it’s best seeking the advice of an experienced accountant.
We can help with all of your business and personal tax and financial planning needs. For a strategic review of your finances, please contact us.
Disclaimer: We don’t take any responsibility for actions taken based on above information. Please speak to our financial advisor if you need more information. This guide was written specifically for Smart Accounting clients. Some of the information contained in this guide might not be applicable if you do not have a business managed by Smart Accounting. By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details are correct at time of writing.
ABOUT THE AUTHOR: Kara Copple
Content creator with a keen interest in writing about business and finance – moonlighting as a fiction writer and blogger. I write content on a variety of subjects to help businesses grow.