97
IT’S YOUR BUSINESS
WWW.BRIDALBUYER.COM
T
ax can be an absolute minefeld and ensuring
that the correct income is declared is
vital. However, the matter of what can be
expensed is open to interpretation and
misunderstanding. On the one hand you
don’t want to miss out on valuable reliefs,
yet on the other, you’ll not want to
mistakenly claim for something that isn’t allowable
and possibly give HMRC an excuse to conduct an
investigation into your affairs.YOUR ACCOUNTS
The accounts you draw up are a summary of income
and expenses, generally for a period of 12 months,
and are declared to HMRC on your tax return.
Moving on to what can be claimed, it’s important to
note that expenses are costs to a business that are
incurred “wholly and exclusively” for the purpose of
trade. As a result, these expenses can be deducted
from your total income, allowing you to claim
tax relief on them. If you trade via a limited
company then by defnition these expenses are
to be “wholly, exclusively and necessarily” for
the purpose of trade.
However, not all expenses are allowed relief
against your income. Your allowable expenses
are the same as those whilst you are employed,
as well as equipment; replacement of parts;
professional indemnity insurance; professional
subscriptions; course fees (in some cases); accountancy
fees; advertising and marketing; printing; stationery and
books; postage; use of home as offce; mileage and business
travel; subsistence; staff wages; and cleaning and laundry.
There are also partial allowable expenses, which you can
claim, at an appropriate percentage or reduced amount,
in certain circumstances to account for private use. These
relate to motor running costs; telephone; hire purchase
(leasing) interest; and other loan interest.
Of course, not all business-related expenses can be claimed
against your income, so it’s worth seeking guidance from
your accountant.HOW THE EXPENSES SHOULD BE RECORDED
An important part of the tax process is the need to keep full
and proper records of all business income and expenditure.
This means, in simple terms, retaining all receipts and
invoices relating to business expenses as HMRC has the
power to enquire into your affairs and may ask for evidence
to support your claim. By law you are required to keep your
records for a minimum of six years - note that penalties may
be charged for failure to maintain or retain records.
Not everyone uses full-blown accounting software so at
the minimum, consider using an Excel spread sheet, with
references to the relevant documentation, to keep track of
your expenses.The better the record keeping, the easier it is to draw up
accounts, and if using an accountant, the lower the bill for
his service. The advice is that, where relevant, you retain
income received summaries; bank statements, cheque book
stubs, paying-in-books; bank loan statements; HP/ leasing
agreements; expense invoices/receipts; and records of
business and private mileage.
You must note the sources of all monies into your various
accounts including non-business-related income. Your
records do not need to be sophisticated but you should keep a
record of all transactions as they arise.
Income is taxed in the period in which it is earned, even
though this is not necessarily the period in which the income
is received. In contrast, expenses are recorded on an earnings
basis and are deducted in the period in which they relate to
which may not be in the period they are paid.
Since 6 April 2013, self-employed individuals can
generally opt to be taxed on a cash basis where they
are taxed on total income received, less expenses paid,
within the relevant period. There is little distinction
between capital costs (fxed assets) and revenue costs
(recurring costs) here. Therefore capital costs paid in
a given period, on which capital allowances would
normally be claimable, are treated as normal business
expenses, having been adjusted for private usage.
But to qualify for cash basis of taxation, certain
conditions need to be satisfed. The single most
important condition is that all receipts recorded
for the period must be below the VAT registration
threshold. If the total of receipts exceeds twice the
amount of the VAT registration threshold at the
time the year after, the business must leave the
cash basis system of taxation. It’s worth noting
that businesses do have the option to utilise cash
basis taxation for their future tax years where
there has been a change of circumstances. Your
accountant should advise you frst before joining
the scheme.USING YOUR OWN VEHICLE FOR BUSINESS
PURPOSES
You can claim business mileage at the rate of allowance
publicised on HMRC’s website (http://www.hmrc.gov.uk/
rates/travel.htm) for the particular fnancial year. This
allowance can vary dependent on the rate agreed by the
Chancellor in the Budget. It is advisable to keep a record
of the date and purpose of the trip, along with the location
and customer you are visiting. You will also need to take
this to your accountant at the tax year-end as they can
claim the mileage expense against your income.
Note that if you are claiming business mileage you are
not allowed to claim fuel expenses and motor repairs.HMRC CAN INVESTIGATE
In extreme circumstances HMRC may disallow expenses
you’ve claimed for taxation purposes. Their reasoning for
this could be that they believe the expense claimed is not
incurred “wholly, exclusively and necessarily” for purpose
of trade. A good example of this is where they consider the
expense relates to a private trip.
If this is the case, HMRC would then seek to impose
penalties depending on the behaviour of the tax payer. This
could result in higher penalties imposed if they deem this
to be fraudulent or negligent conduct; unless it is proven
otherwise to be an error that arose innocently. BBWhat can be expensed and how should they be recorded?
RA Accountants’ client manager Majid Rasheed tackles the
minefield that is tax.Claiming all your allowable expenses
03“The matter of what
can be expensed is open
to interpretation and
misunderstanding”095-097.BB.163.business.indd 97 29/05/2014 16:20