Mike Truman highlights some allowable business expenditure for the entrepreneur.
Why would you not, as an entrepreneur, claim all the business expenses to which you are entitled? Yet all too often business people forget or underclaim, either because they don’t realise what they are entitled to, or because their circumstances have changed and they fail to make the necessary adjustments.
Working from home
People working from home normally realise that they can claim a part of the running costs, but may initially have found the complications of a full calculation off-putting, especially if the business started part-time. As a result, they may still be claiming a fixed deduction of, say, £10 per month. Even under the simplified expenses scheme this is too low if you work for more than 50 hours a month actually at home (so not out visiting clients); the rates are £18 a month for 51-100 hours and £26 for more than that.
However, if you are working over 100 hours at home you have almost certainly set aside at least one room primarily for work (don’t make it exclusively for work, as that can give rise to capital gains tax problems when you come to sell). If you have high housing costs – if you rent, for example – it can be better to work out a true proportion of the expenses and claim that.
The HMRC guidance for doing so is notoriously vague, and relies on interpreting examples. The starting point is to work out the total expenses. This includes mortgage interest (but not capital repayments), rent, heat, light, etc. One point often overlooked is that general repairs to the house can be included, such as replacing the gutters.
The next step is to work out the number of rooms in the home and then the number used for business. This gives a proportion of the expenses, but whether this can be claimed in full depends on how the room is normally used when you are not in it. If the room is then used for other things, for example as a dining room, then you can only claim 1/24th of the expense for each hour per day you work in it, which will significantly reduce the claim. If, however, it is normally still seen as your office (or workshop, or studio), and only very occasionally used for non-business purposes, you should be able to claim almost all of the expenses relating to that room. If you are in that situation, read carefully examples 4 and 6 (‘Chris the author’ and ‘Gordon the architect’) in HMRC’s Business Income manual (at BIM47825), available on the Gov.uk website.
I can’t claim for that…can I?
Depending on how long you have been in business, the rules may have changed for some expenses. Often they have become more restrictive (for example, it used to be possible to claim for entertaining overseas customers; now there is no deduction for any business entertaining), but occasionally they have been relaxed. One example is the cost of broadband. When working from home, it used (in theory, anyway) to be treated as a fixed cost that could not be apportioned because it had both private and business use. Now it can definitely be apportioned, and if the overwhelming use is for business it can all be claimed.
Most construction workers will know that they can claim for hard hats and boots (although many forget to keep the receipts). While clothing is not normally allowable, because it has the dual personal purpose of keeping you warm and decent, protective clothing is. But construction workers are not the only self-employed workers who have to visit building sites, and health & safety is an ever-present feature of business life. So that pair of steel capped boots should be allowable if they were needed for work, even though you can also use them when you are relaying your patio.
Business or private?
A mistake that many people make when starting in business is to only claim those expenses that they would not have incurred before. While some caution is needed about personal use, most people go into business in an area where they have a long-standing interest, and where they may already have some expenses. A photographer who develops a hobby into a business may well have subscriptions to magazines and membership fees for a photography society, etc., which can normally be claimed. A financial adviser may have read the Financial Times for many years as an employee, but a subscription to the paper that also includes access to the website may now be an indispensable business tool.
This also highlights another exception to the rule about not being able to claim for expenses where there is private use – you can if you can show the private benefit is incidental. The cases in this area relate to the now rather arcane area of private members’ clubs. In general, a subscription to a members’ club was not allowable because it brought private as well as business benefits. However, it has been held to be deductible when it could be shown that the purpose for paying the subscription was to get the benefit of cheaper accommodation at the club than could be obtained elsewhere; the other benefits were incidental to that business purpose.
Some visitors to London in particular may still benefit from that ruling, as there are still a number of smaller private members’ clubs offering rooms at attractive rates (attractive for London, anyway). However, a little lateral thinking might suggest other ways of using the same rule. What about the cards that give you half-price meals at restaurants? If you regularly take staff out for meals, and the savings you make by subscribing to such a card more than cover its annual fee, then that fee should be allowable. You would then get the incidental private benefit of half-price meals for yourself, and the incidental but non-allowable business benefit of half-price meals when entertaining customers or suppliers.
And finally, no article on expenses is complete without a reference to Christmas parties… I know, I know, but the first advertisement I saw for booking your Christmas party was at the Oval cricket ground in July! Most entrepreneurs with significant numbers of staff will be well aware of the rules – no more than £150 a head per attendee, including any overnight accommodation or transport costs, etc.
However, many employers have given up on a company-run Christmas party because of the potential for what might euphemistically be described as ‘human resources issues’. They often miss the fact that the exemption can be applied to one or more annual events, not necessarily at Christmas. £150 a head could cover a number of smaller, less formal, get-togethers – just make sure there is a programme of them repeating each year, and that all staff are invited.
Entrepreneurs without staff may be less familiar with these rules, but if they operate through a company, or even if they are self-employed and employ their spouse, there is no reason why they should not have an annual Christmas ‘works outing’. All members of staff must be invited, but that might just be the husband and wife directors, or just the husband who is employed by the wife in the business. It is reasonable to allow each member of staff to bring a guest, so husband and wife directors could invite another couple of friends.
Make it clear that you are inviting them to the ‘X Ltd Annual Dinner’ and you can run up a bill of £600 that is fully tax allowable – that might pay for dinner, bed and breakfast if you choose carefully. And if you invite a couple of friends who also run their own business, they might return the favour…
This article was first printed in Business Tax Insider in September 2016.