Nobody wants to pay more tax than they need to, but sole traders and directors of limited companies commonly pay unnecessarily high tax because they simply don‘t realise the extent of expenses that they can claim against their income.
According to HMRC, expenses that are incurred “wholly and exclusively” for the purpose of your business can be claimed against your income. So the first point is to find out which expenses you have incurred; for example, rent and rates for your business office, telephone, computer software, business travel, staff wages, marketing costs, insurance. All the usual expenses that you would expect a business to incur.
Then there are “other expenses” that could possibly be claimed but have a personal element to them as well, such as holidays, entertainment and leisure. In tax there is a confusion over what “wholly and exclusively” means, and what the purpose of the expenses was. So, let‘s look at some expenses that, if done correctly, you can claim but if you’re not careful, you won‘t be able to claim at all.
Entertainment i.e. drink, food etc.:
This is an area of expenses that the tax authorities don’t allow you to claim against in general, but where you meet certain conditions, you can.
Staff entertainment: You are allowed to claim £150 a year per head for entertainment. Even if it’s just yourself, as director of a limited company, you can still claim this expense against your income. Because you (the director) are classed as an employee.
Contractual obligation: Where it’s part of your business to entertain, say if you’re providing a training course to businesses and you entertain them as part of the course – maybe providing tea, coffee, lunch and so on – even if it’s food, you’re still allowed to claim that because you’re under a contractual obligation to give them food.
Quid pro quo: Let’s say you’re a freelance journalist and you want to speak to say Andy, a man who has world of experience on a topic you’re writing about. You offer to take Andy out to lunch in exchange for his insight into the topic which you’re researching. Because Andy is coming to the table with something of value but not benefitting from it apart from getting free lunch, you’re actually allowed to claim the expense, even though it appears as entertainment.
Holidays are another expense that most people don’t expect to be able to claim against but, again, if done correctly, you can. This is an area where there’s a lot of confusion but let me give you three common scenarios:
- Extending a business trip: You need to go on a business trip to, let’s say, Las Vegas, and since you’re going there you decide to spend an extra day or two to do some shopping or sightseeing. There’s a great myth that because you’ve mixed business with pleasure, you can’t claim any of the trip expenses because now the trip has “dual purpose” and according to tax laws, you can’t make a claim for such a trip. But that’s not applicable if the primary purpose of the trip is business, that’s the key thing. But the only amount that you can’t claim against is the extra cost of staying in Vegas a bit longer. If you spend £1000 on the business trip and then the extra cost is £200, you can then pay the company back £200 and still claim the £1000 against its income, because the primary purpose of the trip was for business. Make sure you keep proper records, notes and also board minutes to document the main reason for the trip.
Also, if you decide to bring your spouse but they’re not a business partner or employee, then all you have to do is separate the cost; your spouse’s flights will be disallowed but your flight will be allowed and so on. So, simply put, as long as the primary purpose of the trip is business, you can claim against any cost in relation to that. Other non-business related cost will be disallowed.
- Mixing pleasure with business: Let’s say you’re on a business trip somewhere nice and decide to go to the beach, without incurring additional cost. That doesn’t mean you’ve ruined the chance of claiming the cost of the trip against your income, it’s just another myth. But because the original purpose of the trip was for business, you can still claim the whole amount through the company. All you have to do is keep receipts for everything that you’re meant to be doing on the business trip and claim that against your income, your little fun on the beach doesn’t matter. Why because there is no additional cost and it’s just an incidental benefit from the main business purpose.
- Turning holiday into a business trip: This is the only time where you absolutely cannot claim expenses against your income. When you go on holiday and the purpose of the trip is personal but then you decide to do some business while over there, you’ve waived your right to claim any expenses. Because the purpose of the trip was personal, you can’t claim any of the cost incurred while doing business.
A few other areas that might surprise you
Lastly, school fees, care home fees, staff holidays, and even golfing lessons – these can be claimed as a business expense in certain circumstances and you run your business through a limited company rather than sole trader or partnership.
If you provide your employees with vouchers that they can exchange for a holiday, HMRC allows you to claim against that, as long as you report this cost as a benefit to your staff. So as director, you can have your company pay for your holiday, the company reports this as a benefit – much like company car or medical benefits – then pays Class 1 National Insurance on the cost and you as an employee pay tax on it, either 20 or 40 percent. Then, the company can claim the cost of this benefit against its income. Is it worth it? Yes, because the crucial point is that the company would have to pay higher tax on the holiday cost if it went through the payroll, so this way you can keep the salary cost down. This goes for school fees or care home fees too or leisure such as golf club fees, gym membership and so on.
There is a helpful guide on HMRC’s site under their expenses and benefits section on this so if you’re not using a tax adviser or an accountant, you might find it useful.
So my advice is to look carefully into any cost of your business, whether you’re a sole trader or director of a limited company, because even the least likely cost might be claimed against, as long as it’s done correctly or you seek advice. And make sure you get the paperwork and evidence right. Otherwise, you might be paying more tax than you have to, allowing your business to bleed money that it perhaps can’t afford.
ABOUT THE AUTHOR
Jonathan Amponsah CTA FCCA is an award winning chartered tax adviser and accountant who has advised many clients over the last decade on tax deductible expenses. Jonathan is the founder and CEO of The Tax Guys. He is also the co-founder of Easy Tax Returns (a tax return app to help tax payers avoid stress, penalties and find their peace).
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