Is it a nightmare trying to work out all of your business expenses?
And do you even know what you can – and can’t – claim tax relief on when you’re preparing your business accounts?
In this article, I’ll reveal the five most common mistakes that self-employed people make when claiming expenses.
Are you making any of them?
1. Claiming all food and drink when you’re out and about
When you’re a sole trader or a partner, you’re not allowed to claim the cost of all food and drink you buy when you’re out and about on business. HMRC takes the stern line that everyone must eat to live, and it is less generous with the self-employed in this area than with employees.
You can only claim tax relief on the cost of your food and drink when you’re making a journey that’s outside your normal working pattern, such as going to visit a client who you usually deal with online. HMRC don’t define “normal working pattern” in any more detail, so if you include a claim for the cost of food and drink on this basis, be prepared to justify it to a visiting inspector.
You can also claim “reasonable” costs of food and drink if your business is by nature itinerant – for example if you’re travelling round the country with a mobile children’s zoo – or if you’re staying away from home overnight on business.
2. Claiming too much in motor expenses
You can claim the cost of making business journeys in your own car, but there are two separate ways you might be able to do this, and a common mistake is to mix them up.
If your turnover is under the VAT threshold (which is £77,000 a year at the moment) you can use what I call the mileage method, which is to add up your business miles and multiply them by HMRC’s approved mileage rates, and claim tax relief on that cost.
The other option is what I call the actual cost method, which is to add up the total of everything you spend on the car – petrol, repairs, insurance, MOT etc… – and multiply that by the business use percentage of the car. You’d work that out by adding up your business mileage and your personal mileage, then taking the business mileage as a percentage of your total mileage. Using this method you can also claim some capital allowances on the cost of the car.
You can’t combine the methods, though. HMRC’s mileage rates are designed to cover the full cost of buying and running the car, so you can’t, for example, claim both mileage and capital allowances.
3. Not claiming business use of home
If you work from home as part of your freelance business, whether that’s all the time or just occasionally, then you may well be able to claim some of the running costs of your home as costs of your business, so reducing your tax bill.
For more information, check out this video.
4. Treating non-employees as staff
Unless someone is actually on your payroll as an employee, the cost of taking them out for a thank-you for their work counts as business entertaining. That applies even in the case where a friend or family member helps you in your business and you don’t pay them cash. They still don’t count as an employee.
You should include these costs in your business’s accounts, but the business can’t claim any tax relief on them – and if your business is registered for VAT then it can’t claim back the VAT on the cost of business entertaining either.
5. Not keeping all receipts
When you spend your own money on costs for your business, the business can still usually claim tax relief on those costs, but only if you’ve kept a record of them – so don’t lose your receipts when you pay for business expenses with your own cash.
Also make sure you file all of your receipts properly. Using an online accounting system – such as the Expenses area in FreeAgent – should help you track all of your receipts, and you may be able to save even more time by using an application such as ReceiptBank to turn your pieces of paper into costs in your accounts by photographing them on your iPhone.
Claiming expenses can be a confusing issue for many micro businesses and freelancers. So make sure you don’t risk paying the wrong amount of tax and making the wrong decisions about your business by not including the right costs in your accounts.
Today’s Micro Action
Have you fallen into any of these traps? Either talk to your accountant or spend some time today working out what’s needed in your business to ensure your expenses best reflect your costs.