Business expenses

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Business expenses

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Why should you read this guide?

Some business expenses are an allowable expense for your business for tax and VAT purposes and some are not. This guide will introduce you to the treatment of expenses.

Background

When running a business both you and your staff will incur expenses that are on behalf of the business. These expenses should be paid back by business funds but need to be treated properly from a tax point of view. You may choose to use business credit cards in the business for handling things like entertainment or motor expenses, this will be paid back by the business without involving the employee. Another option is to use petty cash for minor expenses of the business or to pay the employee on a regular basis against expenses claims. In all circumstances you need to keep receipts as an accountable method of tracing the money spent.

Allowable or non-allowable

When looking at expenses you need to decide whether they are for business purposes. If they are then you can use them to reduce your tax liability against profits. Basically if the expense can be shown to be part of the running of the business in the goal to make sales and profits then they will be allowed against business tax. Expenses such as non-business fuel costs are not allowed.

Types of expenditure

The main types of expenditure incurred are to do with motor expenses, entertainment and accommodation. In the main all of these are allowable if they are considered to be in the normal course of business. In these circumstances the employee will not incur any additional tax liability. Mileage must only be claimed for journeys during work rather than to and from the workplace. Meals and overnight accommodation can be claimed when working away from home, additional expenses such as newspapers and phone calls can be covered by an overnight allowance as individually they are not allowable.

VAT

The treatment of expenses for VAT purposes is considerably less straightforward than for other taxation. The expenditure must be proven to be wholly for business purposes - anything that cannot be proven as such is unlikely to be allowed. It is best to discuss this with your accountant.

PAYE returns

If the employee in question earns less than �8,500 per annum there may be no need to send a return to HMRC unless they are a director of the business. All other expenses payments need to be summarised annually to HMRC on form P11d. At this point the employee may be taxed on any benefit in kind deemed to have taken place. An example of this would be if they have use of a company car for more than business miles or if you pay them expenses over the allowable amount by HMRC.

Summary

There is a fine balance between paying employees expenses for carrying out the job and them incurring additional tax for benefits in kind. The best thing to do if you are in doubt is to discuss this with your accountant. You need to record all expenses paid to employees and ensure these are filed with your annual return where necessary.

Further information

For information on how to complete annual returns log onto www.hmrc.gov.uk/paye/exb-intro-basics. For general information on employee expenses log on to www.businesslink.gov.uk who produce various fact sheets on the subject.