Self-Employed Tax: Small Business Expenses Explained

May 30, 2015

Making business expense claims is an important part of saving tax but what exactly are expenses? And how do they work?

Our expert accountants up in Leeds get a number of questions relating to small business expenses.

They often want to know exactly how business expenses can be utilised for their company and how they actually work.

Some accounting practices — such as claiming business expenses — can seem quite complicated and daunting, leading many small business owners to simply avoid using them altogether. However, expenses are a vital part of saving money on your self-employed tax payments and should always be taken advantage of.

Claiming expenses and improving those small business accounts isn’t as tricky as you might think. Our team of accountants from Leeds have put together this blog to help you understand the simplicity of claiming tax expenses and how the whole process works.

What Are Businesses Expenses?

Business expenses can be claimed by any business, be it a one-man operation or international corporation. The only stipulation is that they must two things: necessary and ordinary.  

This means different things to different businesses, thus the whole premise of business expenses is based entirely on the type of business you operate.

If you run a software development company, you are allowed to claim expenses on anything deemed both necessary and ordinary for your business to operate effectively. This includes computers, desks, space to store your servers etc.

If you were to run a plumbing business, it wouldn’t be ordinary or necessary for you to claim on computers or desks, but you could claim on tools and supplies.

Both businesses, however, could claim on items like train tickets as travel is often required for most types of businesses. 

How Do Business Expenses Work?

Let’s keep that idea of a train ticket in mind.

There is plenty of misunderstanding amongst small business owners about how business expenses actually work.

There is an assumption that if you make a claim, you are reimbursed for the amount of that claim, but this is simply not true. Claiming business expenses is not the same as claiming expenses as an employee from an employer.

Everything costs something, and HMRC isn’t going to pay the full price of your train ticket. What they will do, however, is allow it to be claimed as a tax-deductible expense.

What this means is that you can deduct the total cost of the expense — say, a train ticket — from your income tax, reducing the amount of tax you have to pay.

Here’s an example:

These are your fictitious small business accounts — the principles apply to both limited companies and sole traders:

Income                             £10,000

Outgoings                        £4,000

Gross Profit                    £6,000

Tax at 20%                      £1,200

Now, you’ve just bought a £100 train ticket to get to a business meeting in London. We must adjust the accounts to reflect this additional cost.

Income                              £10,000

Outgoings                        £4,100

Gross Profit                     £5,900

Tax at 20%                      £1,180

As you can see, outgoings go up by £100, profit goes down by £100 and tax goes down by £20. You haven’t saved money or broken even, but you have claimed back £20 on an expense that was necessary for continued business operation.

Claiming Small Business Expenses

Now we’ve covered what a business expense is and how they work, it’s time to look at how to actually claim them.

The benefits of claiming small business expenses are obvious. It might not be total reimbursement, but it’s a partial return on your business investments that can add up to a great deal of tax savings. 20% is better than nothing; it’s a worthwhile method of reducing self-employed tax payments.

To claim tax you simply need to record all necessary expenses and register them on your tax returns. You’ll be offered an opportunity to declare all business expenses, and deductions will be made there and then.

Here are three top tips on claiming expenses from our accountants in Leeds:

Tip 1: Evidence is required for claiming business expenses. If you lose the £100 train ticket — or the receipt that came with it — then you cannot claim it as an expense, as HMRC will not take your word for it. As a result, you will pay more tax than you owe since your profit is artificially high. Keeping expense records safe and secure is vital for keeping costs down.

Tip 2: If you are thinking about investing in a marketing campaign, training course, employee, computer or piece of equipment, consider the fact that the actual cost to your business will be lower than the initial bill. Remember, thanks to 20% tax deductions, if the cost of the expense £1,000 its net cost will only be £800. This is a simple but noteworthy detail that comes in very handy when budgeting.

Tip 3: You should never be afraid to ask for help. Whether you are unsure of what expenses you can claim on or you are struggling to manage your tax returns, expert help is always available.

Our accountants from Leeds are always on hand to answer any burning questions you might have and can help ensure you saving as much tax as possible. Choosing to muddle on by yourself can lead to costly mistakes, so don’t wait around hoping things will eventually get better.

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