It can seem counter-intuitive that claiming your business expenses will improve the financial health of your company as they eat into your company profits; but business expenses are deducted pre-tax and VAT, so in real terms you’ll have more cash in your business and your pocket.
In its simplest terms, you should be looking to record any expense, paid by the business, by you, or by your employees that is for physical items or services needed to run the business. The HMRC rule is clear on this; a business expense must be necessary and wholly and exclusively incurred as part of the day-to-day running of your business. But they don’t necessarily have to be related to the specific contract you’re working on. Personal items and expenses must not form part of your expense recording; examples include clothes (non-uniform), dry cleaning and supermarket shopping.
Examples of business expenses include:
- Business equipment – laptops, mobile phones, furniture, storage devices
- Consumables – pens, paper, ink, stationery
- Professional fees – accountants, solicitors, patent attorneys
- Marketing – websites, advertising, hosting fees
- Professional development – membership fees, subscriptions, books, training
- Insurances – professional indemnity, contents, liability insurance
- Travel – mileage, public transport, taxis
Take an annual party
HMRC allows you to reward your employees and their partners with annual events, such as Christmas parties or summer barbecues. You’re allowed to claim up to £150 per person (including VAT), which can include food and drink; and even transport and hotel stays.
What you need to know:
- The event must be an annual event and open to all employees.
- The £150 applies per person, and you can even claim for partners who don’t work for your company – so that’s £300 per couple.
- You can only claim for a maximum of £150 per person, if you claim just 1p over this the whole amount becomes taxable.
- It’s not an allowance – you cannot just claim the amount as-is, you must claim for an actual meal or event and provide receipts.
- It’s not just for Christmas parties – the allowance applies to any annual event. You could even have a Christmas party and a summer event too – as long as the combined total is £150 per head, or less.
Even if you’re a one-person limited company you can still claim back the cost of annual company events – so why not treat you and your partner to a festive soiree or a summer getaway?
Claim for business start-up costs incurred before you formed your limited company
Yes, business set up costs can be claimed as business expenses. Any expenses that are paid for using personal funds should be documented and claimed for when the company starts trading. You do need to remember a few rules when claiming this type of expense:
- Does it meet the business expense criteria above?
- For Corporation Tax purposes, the expense must be no more than 7 years and for VAT purposes no more than 6 months before you started trading. In reality, it would be best to concentrate on the expenses incurred 6 months or less prior to the start of trading.
Transfer personal assets into your company
When you start your business, you may have some existing personal assets that you’d like to transfer into your company. This is a great way of keeping the start-up costs low as you aren’t buying brand new equipment. The main benefit is that the cost of the transfer (what your company pays you for the equipment) is a business expense and therefore has a positive impact on your tax liabilities.
Transferring personal assets to your company is straightforward, as long as you take a pragmatic view of the value of the assets. If you have an asset that was originally purchased for personal use you’ll need to establish the current market value of the asset. You cannot claim the full cost of the asset, unless it was purchased solely for use by your new business. A straightforward method to establish the value of a used asset is to research the second hand market – eBay is a simple way to do this.
Once you have determined the value of the asset, you need to prepare an invoice from yourself to your company listing the items and cost of each separately. If you have the original purchase receipts for the item, it is useful to attach them for your company records.
Appointing shareholders to maximise tax efficiencies
As a part of the company formation process, you need to decide who will be a shareholder in your limited company. If you choose to appoint family members as shareholders, it enables you to distribute company profits to them.
Shares are used to apportion ownership of your limited company. Ownership of shares in a company usually affords the shareholder voting rights and therefore influence over the running of the company. Shares are also used in the distribution of profit from the company; shareholders are paid dividends based on the number of shares they hold. It is a key part of ensuring your business is as tax-efficient as possible so it is important to make sure that the distribution of company shares works for you. Shareholders should be a spouse, a civil partner, or anyone who actively works in the business.
Many contractors and consultants are the sole shareholders within the business, but there is a fair proportion that utilise shares to ‘pay’ other individuals linked with the company in a tax-efficient way. This is a technique used to share dividend income with a spouse, for example, and can maximise unused personal tax allowances. This is particularly effective if your spouse or partner earns less than £50,000 per year.
(If you join inniAccounts, we’ll talk through your company structure to make sure it’s as tax-efficient as possible, based on your specific circumstances).
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