A quick guide to tax-deductible expenses
Understanding what business expenses can be deducted from your tax return is crucial for a healthy business. Your company’s essential running costs may be considered by HMRC as a legitimate, tax-deductible business expense which can, in turn, contribute towards reducing your tax bill, resulting in greater profit or income for you.
Being able to identify and correctly report business expenses is, therefore, crucial to every business. Sounds straightforward? Let’s find out more with Mooncard.
What are tax-deductible expenses?
Tax-deductible expenses are expenses that a company or self-employed worker has to pay in order to operate properly. By deducting these expenses, the company’s overall tax bill is lowered.
For example, if your sandwich-selling business took in £50,000 in 2021, but paid out £15,000 on bread, sandwich fillings and other expenses that may be able to be claimed as a tax-deduction, then you will only be taxed on £35,000. It is obviously in the best financial interests of the company to maximise its tax-deductible expenses while maintaining maximum profit.
A vast range of expenses can be considered tax-deductible (also known as “allowable” expenses). These can differ widely, depending on the nature of the business. No two businesses will have the same tax-deductible expenses.
Some of the most common tax-deductible expenses include:
- Phone and internet bills
- Travel costs (fuel, public transport)
- Office supplies (stationery, etc.)
- Clothing expenses (uniforms and personal protective equipment, PPE)
- Stock and raw materials
- Electricity costs
- Relocation expenses (up to £8,000 under certain circumstances)
- Financial and legal costs, such as accounting and banking services
- Insurance costs
- Advertising and marketing costs (including websites)
So far, so good! Things get a little more complicated when it comes to specific costs, which are covered by detailed HMRC guidelines.
Meal allowances and overnight expenses
When staff are required to travel away from their regular workplace to conduct business (to visit a supplier or client, to attend an event, to carry out prospecting, etc.) there are certain essential costs which arise.
Under certain circumstances, meals and overnight accommodation can be tax-deductible. These include travel to locations that are not considered to be the “usual” workplace and travel that requires one or more overnight stays.
When an employee has to travel to another site to work, whether this is to another branch of the organisation, a client or supplier’s premises, a trade fair, a training course, etc. they can claim either a meal allowance or the actual costs of the meal from their employer. In turn, the employer can claim these expenses as tax-deductible. In order to be tax-deductible, the expense must not only be incurred as part of business activities but must also be considered “reasonable” by HMRC. In other words, extravagant meals and excessive and expensive drinks would not pass the test of “reasonable” expenses.
It is up to you whether you give your employees a fixed meal allowance (also known as a per diem) or whether you cover the actual costs of the meal, in which case receipts will be required for your bookkeeping. Even if the fixed meal allowance option is chosen, HMRC recommends that proof of purchase should be kept, in the event of an inspection.
Similarly, if the employee has to stay overnight, perhaps attending a three-day conference in another city, or a week-long training course, or even working for a longer period in another branch of your company, they will also require breakfast, lunch and dinner. Again, this can either be covered by a fixed meal allowance or by tracking the actual expenditure.
HMRC provides guidelines on the maximum amounts that employers should cover, depending on the destination and the length of time the employee spends there. It refers to these amounts as “scale rate payments”
If the employee is travelling away from the workplace but remaining within the UK, the following scale rates apply:
|Minimum time away from the usual workplace||Maximum meal allowance|
HMRC has also published a list of countries and cities with scale rate payments that again vary depending on the length of time spent there. To take just a few examples of European countries (RR = room rate):
|City||5 hours||10 hours||24 hours|
|Athens - Greece||€28.50||€62.50||€67.50+RR|
|Helsinki - Finland||€33||€75.50||€82+RR|
|Paris - France||€40||€86.50||€117+RR|
Of course, it makes sense to have variable rates, in that while £28.50 might get you a decent lunch or dinner in Athens, it wouldn’t get you very far in Paris!
What are proportionate costs?
The recent COVID-19 pandemic brought about an overhaul in working practices. As offices and factories were forced to close down or work with a skeleton staff, working from home became the norm for millions of people.
As the pandemic passed, most people gradually returned to the workplace but others chose to continue working from home. Many employers also realised that productivity was up, staff morale was up, and costs were down as a result of allowing some, if not all, staff to work from home.
However, this change in working practices does have financial implications. If an employee is working from home, they are using their own electricity, water, and internet connection, while paying rent or mortgage, council taxes and so on, on their own home. In such cases, it is appropriate to calculate the proportionate amount that the employee is using for business purposes, which will then be considered tax-deductible.
Proportionate expenses are calculated by working out the proportion of the expenses that are used for business purposes.
For example, if there are five rooms in the home and one is used as an office, then the proportionate expenses are 20% of the relevant household expenses multiplied by 8/24 (number of hours per day the office is in use), multiplied by 256/366 (the number of days in the year the office is in use).
Making this type of calculation and keeping all the relevant receipts from each payment is often seen as too cumbersome for some employers, who prefer to opt for a fixed rate payment to cover such costs. In this case, the employer uses the government’s simplified expenses scheme, which sets out a flat rate based on the number of hours per month the employee works from home.
|Hours of business use per month||Flat rate per month|
|25 to 50||£10|
|51 to 100||£18|
|101 and more||£26|
It should be noted that the flat rate scheme does not apply to telephone and internet expenses, the actual costs of which must still be claimed in the usual way.
What cannot be claimed as an allowable expense?
The same refrain applies to all HMRC guidelines and regulations on tax-deductible expenses: they must be incurred “wholly and exclusively” for business purposes. With the exception of the “proportionate costs” mentioned above, tax-deductible business expenses cannot cover joint personal and business costs. An employee visiting Euro Disney and eating out in a Michelin-starred restaurant while on a work trip to Paris is jeopardising all their business expenses, regardless of how hard they are working the rest of the time.
Staff salaries can be claimed as long as the staff directly work for the business. In other words, personal staff (such as cleaners, personal trainers, childcare etc.) cannot be considered a business expense.
Other costs that cannot be considered as business expenses include things like parking fines, entertainment, the purchase of new properties, and the daily commute from home to the usual workplace.
Regardless of which of the various methods are chosen for granting and reimbursing business expenses, accurate accounts and documentary evidence are essential.
New technology has certainly simplified this essential task. Employees can now take pictures of their receipts and apps can automatically file expense claims. Mooncard offers various solutions, including the Mooncard corporates card, that can help you keep track of and report your business expenses. Find out more by booking a free demonstration today!
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