Expenses are one of those things that occur both in your business and daily life, and when it comes to reporting your income to HMRC, it’s important to know how much you’ve spent, what you’ve spent it on – and whether it’s considered an “allowable” or deductible expense on your accounts.
By definition, an expense is “the cost incurred in, or required for something,” – so a personal expense is the cost incurred for something that is specifically for you, and unrelated to the business, and a business or company expense is a cost that is specifically for the business.
Sounds simple right? For the most part, recording your expenses isn’t too difficult – however, there are times when an expense involves both personal and business use, and there are rules on what you can and can’t claim for, and how much you can claim when it does relate to both.
It’s important to record your expenses, as they play an important part in working out how much tax you’re due to pay. At the end of the tax year, you’re required to inform the Tax Office (with a return of some sort) how much you’ve earned.
When you look at a Self-Employed tax return (SA100), you’ll see that you’re asked for your turnover (the amount of money you’ve taken or earned), and then will be asked about your allowable expenses – this might be as a single figure, or you might need to break it down into individual sections.
The reason for this, is the expenses are deducted from the turnover, to give the net profit or loss figure, and it’s this amount that is used to calculate what tax you owe.
Depending on what your business is, and what purchases you need to make, there are a lot of different expenses that are considered to be business ones, so this is by no means a comprehensive list – if you’re not sure whether your expenses are claimable against your tax, you should seek advice.
But some expenses you might claim for include:
The problem comes when you use any of these for personal reasons – such as making personal calls on a company mobile, working from home and spending some of the electric for personal usage, etc.
Personal expenses, as the name suggests, are costs and expenditure that has nothing to do with the business and cannot be added to business expenses.
We mentioned above that some things are bought and used for both business and personal reasons – these items are not 100% claimable, and this is one of the reasons why it’s so important to carefully manage your accounts, in order to keep track of what you’re spending, and on how the items are being used – so you can claim for what’s allowed.
When you’re using an item for business and personal use, and the rules say that the expense would be allowable if it were a business one, then you can calculate your usage – and claim as appropriate.
Let’s put it into example – if you’re using your mobile phone 50% for business, and 50% for your own use, and you’re paying £80 per month on a contract with calls – you could record a business expense of £40 per month in your accounts.
Some expenses are a bit trickier – transport, for example. According to HMRC rules, you cannot claim for the cost of getting too and from work, but you can claim the costs involved with going from work to another work-related location (such as a client’s office). So you would need to keep track of the mileage for the journeys, the cost of petrol, etc – and only claim for the appropriate journeys.
It’s important that you keep a clear record of what you’re spending, and where it’s going. If you earn under the HMRC threshold, you may not need to provide a detailed breakdown of your expenses, but if they decide to audit you – then they’re going to ask for it.
Get into the habit of recording everything you spend, and keep your receipts, invoices, or statements – so you know exactly what is going where, and when; and if you need some help or advice, or want someone to do it for you – get in touch now.
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