Expenses and keeping track of them : what you need to know
All businesses incur expenses for a wide range of reasons. However, not all expenses are
simply a drain on a company’s profit margins. Depending on the nature of the expense,
some expenses can be claimed as deductibles on your business’ tax return. But what
expenses are tax deductible, and how does one keep track of them?
In this article, we take a look at the different types of common business expenses and detail
which ones are tax deductible and why. We also provide you with a simple solution to
staying on top of your business expenses.
What is an expense?
In simple terms, an expense is a payment made by a company for a good or service in order to directly or indirectly generate revenue. The payment might be made to another company, to an individual or to a public authority.
Standard expenses might cover things such as rent, salaries, equipment, or supplies. However, the list of potential business expenses can be extremely varied, depending on the nature of the company.
Expenses which are “wholly and exclusively” for the use of the business are usually tax-deductible. That means that the company can write off these costs, whether they are fixed or variable, in their annual tax return to HMRC, thus reducing their tax liability.
Let’s explore the different types of business expenses your company might incur, from start-up costs to clothing allowances.
Different types of deductible expenses
The precise nature of expenses incurred differs from company to company and no two businesses will have the same list of expenses.
Some of the most common expenses include the following:
- Rent or lease – many businesses operate from premises which are rented or leased, and this payment is a deductible business expense.
- Salaries – as soon as a business employs someone, a salary has to be paid, which is another deductible business expense.
- Supplies and equipment – whether a company is in the business of manufacturing products from raw materials, or providing digital services, there are certain supplies and equipment which need to be purchased.
Other types of expenses are less common but are also tax-deductible. Let’s look at some of them in more detail.
Working from home
As a result of the COVID-19 pandemic, many companies were obliged to close their physical premises, at least temporarily, and had to quickly adjust working practices to allow employees to work from home. Even as the pandemic died down and it became possible again to return to the workplace, many businesses decided to continue to offer their staff the possibility of working from home. For many people, working from home has been shown to reduce stress and increase productivity and businesses were keen to capitalise on this while slashing the costs of running large offices.
However, this change in the working model has certain implications in terms of expenses. When employees are working from home, they will usually need a laptop, sometimes loaded with specialist software, a stable and reliable internet connection, sometimes using a secure line if sensitive information is being handled, ergonomic furniture (desk, chair) and peripheral equipment such as a printer, extra monitor, stationery supplies, etc.
These costs can be written off as business expenses – provided the items are being used wholly and exclusively for the purposes of the business. HMRC states clearly that if something is used both for business and personal use (such as a broadband connection), then it cannot be claimed as a business expense.
But how can you calculate the cost of running a home office that uses domestic electricity and water and possibly involves a rental payment on the property? For example, a person works from a home which has four rooms, one of which is their office. In this case, their household bills, including rent and council tax, are divided by four. Taking into account the fact that the office is only occupied for, say eight hours a day, this figure is then divided by three (8/24) to reach the final tax-deductible figure.
If the thought of calculating the expenses arising from working from home sounds too complex, there is another option offered by HMRC. Employers can offer work-from-home employees a stipend of a fixed amount every month to compensate for these costs. Only costs which exceed this fixed amount are individually recorded, analysed and reimbursed by the employer. HMRC states that this can be at least £6 per month, which is free from tax.
Under certain circumstances, tax deductions can be made for the upkeep, repair and replacement of protective clothing and uniforms when these must be worn as a condition of the job and when the employee must bear the cost. Examples might include police or nursing uniforms, which have to be cleaned and repaired as needed by the employee. Overalls for mechanics, plumbers, builders and so on, are also likely to qualify for tax deductions. Corporate polo shirts, caps and personal protective equipment (PPE) also all fall within the scope of the HMRC’s uniform policy.
The same regulations apply to clothing expenses for self-employed workers.
HMRC has made it clear in a number of rulings that no deductions can be made for the costs of repairing, upkeeping and replacing ordinary clothing.
When an employee is obliged to move house in order to start up a new job, or when they are required to move house by their employer to take on a new role, following a promotion, for example, the question of relocation fees arises.
When the employer (or a third party) pays for or reimburses the employee for the removal costs arising from this relocation, they can claim up to £8,000 (including VAT) in tax relief. This can cover, among other things:
- Moving and storage costs
- Travel and subsistence
- Temporary accommodation
- Legal fees incurred as a result of acquiring or disposing of a property (either a rented or owned property)
- Bridging loans
Meal allowances and accommodation
If your employees take regular business trips and regularly incur costs due to paying for meals and accommodation as a result, it can become complex to keep track of these expenses. Even with the latest apps and corporate expenses cards, it can be cumbersome to record each small expense. That is why some employers prefer to use what HMRC refers to as “scale rate payments”.
These payments are a fixed amount that employees can spend while on business trips without having to keep track of each individual expense.
HMRC provides a comprehensive list of the scale rate payments that are applicable according to the destination and length of the trip. Rates vary depending on the cost of living at the destination and how long the employee is expected to remain there.
Keeping track of expenses
There are a number of ways that companies can keep track of expenses. The first question which arises is the type of accounting method your company uses. Companies either use a cash-based accounting system or opt for what is known as accrual accounting. The main difference between them is the point at which the expense is recorded.
Under the cash-based accounting method, the expense is recorded when the expense is paid out. Similarly, incoming payments are recorded when they are received.
For example, a company may receive and settle an invoice for its electricity every quarter, for a period covering the past three months. The expense is recorded on the day the invoice is settled.
Under the accrual accounting method, the emphasis is placed on when the expense is incurred rather than when it is paid.
For example, a company that receives its quarterly electricity bill actually records it at the start of the quarter, when the service began to be provided, regardless of when the bill was settled.
Depending on the size of your company and the nature of its expenses, one option or another will make more sense. For small companies and self-employed workers, the cash-based method usually works best, while for larger companies, possibly employing a finance officer, the more complex accrual accounting method may be preferred.
Regardless of the type of accounting method you adopt, you will still need to track expenses on a daily basis. This means tracking mileage, meal expenditure, purchases, travel, accommodation and all the other myriad of expenses involved in running a company.
Whether you are self-employed, an SME, a university, a charity or a multinational corporation, one of the requisites for success is good purchasing procedures and a fair expenses policy. But there is no longer any need to have staff fill in a lengthy expenses form and collect paper receipts for every cup of coffee they buy.
With a Mooncard corporate card, tracking expenditures and filing expense claims is easy, freeing you and your employees to concentrate on the core of your business. Book a demo to find out more!