Being a bit cheeky about what business expenses can be claimed may seem harmless in the moment. For example, like most of us this past year you’ve been working from home. You’ve noticed a great spot just right for a hot tub outside of your home office window, so you invest in one. And – why not? – you pop it onto the company credit card to process as a business expense. Be careful – incorrect claims like this can put you in hot water.
As well as upsetting your accountant this could raise a red flag with HMRC. It could even impact on your ability to get the loans you need. Understanding what expenses can – and can’t – be claimed through your business will both protect you and set you up for future success.
Expenses should be wholly, exclusively and necessarily for business purposes
HMRC defines an appropriate business expenditure as something wholly, exclusively and necessarily for purposes of your trade. But what exactly does that mean?
- Wholly and exclusively: this means you can’t claim an expense if it serves a purpose beyond your business. You couldn’t, for example, claim a week long vacation to the countryside as a business expense just because you happened to have a meeting with a client on one of those days. The trip was not exclusively for business, and so it couldn’t be claimed as such. You might, however, be able to claim some specific expenses associated with the meeting.
- Necessarily: this term is harder to define, as it’s often open to interpretation. You might pride yourself on creating a fun work environment for your employees, and thus it’s entirely necessary to purchase a disco-ball for the office! When in doubt, we recommend running it by your trusted accountant (like us!) or imagine how you would justify this purchase if you were called by HMRC. Could you convince a suited and booted tax person that the disco ball was 100% necessary to the running of your business? If not, maybe pop that on the personal credit card instead.
Appropriate and accurate claims can help you save on tax
Let’s look at some of the costs that are likely to be wholly, exclusively, and necessarily for your business. This is not an exhaustive list but it gives a good indication of what is acceptable.
| Purchases to resell | Raw materials, stock |
| Office costs | Stationery, telephone, postage, software |
| Professional fees | Legal, accounting, consulting |
| Travel | Fuel or mileage, parking, public transport |
| Clothing | Uniforms, protective clothing (not a business suit!) |
| Equipment | Computer, printer, office furniture |
| Staff Costs | Salaries, training (business related), pensions |
| Financial costs | Insurance, bank charges, interest |
| Cost of business premises | Heat, light, business rates, cleaning, use of home |
| Advertising | Website, business cards, print ads |
| Professional Subscriptions | HMRC approved bodies |
Remember, the wholly, exclusively, and necessarily guidelines still apply to this list. If you’re driving to important client meetings, the mileage or fuel cost would be a business expense. Driving to your son’s football practice, on the other hand, would not.
Make sure that you are keeping hold of receipts for any business spend that qualifies so you can reclaim as much VAT as possible. Every little helps.
Inappropriate or inaccurate claims can have consequences
While claiming a one-off purchase, or tacking a few extra nights onto the end of your business trip, may feel harmless at the time, it could easily cause you problems. It is quite common for HMRC to ask for additional information to back up a VAT return if your VAT bill is outside of the normal range. If something then doesn’t look right they might decide to dig deeper. Tax investigations on average take over a year to complete, and can be expensive and time consuming.
If you can’t provide the information HMRC have asked for then you can really get in a mess. They can request proof of expenses up to six years after the fact, and if they aren’t satisfied that the expense was valid then they can “assess” additional tax owed, as well as charging interest and penalties. It is vital to have a system in place where your finances are being meticulously tracked and this information is saved in case you ever need it again.
Finally, inaccurate expenses claimed through the business could create issues if you have other shareholders, directors, or partners involved. It could create feelings of mistrust or betrayal between you. Worse, your one-off payment for an office disco ball might make another director feel entitled to claiming more erroneous personal expenses through the business, landing everyone in hot water.
Understand the big picture to make the correct decisions
It isn’t always just about your tax bill. There are some scenarios when having lower taxable profits wouldn’t benefit you. For example, when you’re applying for a mortgage, looking for investments or loans, or trying to sell the business. Demonstrating consistently stronger levels of income suddenly becomes really important.
That’s why it’s key to work out both your long and short term goals and make decisions accordingly. Your accountant can help you prep and plan for all your goals so you’re not left with any regrets.
Get in touch with Starfish today to learn more about how we can support you to make the right decisions on your business expenses.
