You can’t normally claim tax relief on business expenses you incur through a another business, but there may be occasions when the expense is charged to a different business. It’s crucial that you keep separate detailed records for each business so you can keep track of the income, expenses and profitability of each one.
We explore the essentials of claiming expenses to ensure you remain tax-compliant and efficient when running multiple businesses.
Claiming expenses from one business in another
The golden rule for claiming expenses is that they must be incurred ‘wholly and exclusively’ by the business.
You can still get tax relief on expenses which have dual usage (if you work from home, for example), but only on the part that relates to business activities. So how do you work out your expenses if you run multiple businesses?
Limited companies are separate legal entities in their own right, but if you run two or more then there might be times where one of your businesses charges the other for services, goods, or other applicable expenses.
This might be because one company supplies materials to the other, or it could be an accounting solution to shared expenses. For example, if you run both businesses from the same location, then it’s useful to work out the proportion of your costs which relate to each company.
Just be very careful to make sure that you don’t claim the same expenses twice!
If you operate as a sole trader then it’s still best practice to keep the accounting records – and therefore expenses – separate for each business, even though there isn’t (technically) a legal distinction between each one.
Specific contractual agreement
If there is a contractual agreement or some other official agreement between two businesses that allows for the reimbursement or repayment of expenses, it may be possible for these to be claimed.
Reporting expenses when claiming between businesses
Along with keeping accurate records of every transaction and expense in each business, you’ll also need to justify why you’re claiming expenses between businesses. In short, you can’t just move money from one place to the other without keeping a record of why, and what for.
Failing to follow this process correctly could trigger alarm bells for HMRC, and cause a lot of hassle and stress. It might even lead to a full audit of your financial records.
No matter which legal structure you use for your businesses, it’s important to treat each one individually, and keep their records separate.
Claiming expenses and filing tax returns for one business can be complicated and time-consuming as it is. So, if you’re running more than one business, you need to be extra diligent when it comes to reporting and submitting your financial accounts.
Separate bank accounts
Having separate bank accounts for each business is a requirement for limited companies, but it will help any business structure make sure all expenses are tracked in the right place and avoid cross-contaminating funds.
Each company’s expenses should be documented, categorised, and recorded separately to avoid confusion and overlapping information (e.g. transactions incoming and outgoing). That way, you can be certain that both businesses are operating compliantly.
Look for accounting software that allows you to manage multiple businesses from one system. This streamlines the process of tracking and managing expenses for each business so there’s far less chance of error, omission, or overlap.
Fewer errors also mean less chance of overpaying tax by accident, so investing in great booking software is also a good way to protect your cash flow.
Avoid HMRC penalties
This applies even if you own a limited company and a sole trader business, for example. No matter what the nature of the business, it’s recommended to keep them as separate as possible when it comes to finances and taxes.
If you aren’t vigilant in making sure each business has its own accounts and the correct financial records, you could find yourself in trouble with HMRC. Errors are easy to make and even honest mistakes can result in large fines if you aren’t extremely careful.
How an accountant can help you
To reduce your stress levels and the risk of mistakes, we’d recommend enlisting the expertise of a qualified accountant who can help you claim expenses for multiple businesses.
A skilled accountant will be able to help you understand which allowable expenses are deductible for each business and help make sure you’re maintaining proper documentation to support this.
Plus, they’ll make sure you’re operating in the most tax-efficient way possible, which includes ensuring you’re taking advantage of all applicable tax relief.
They will also familiarise you with the tax implications of each business structure (sole trader, limited company, partnership, etc.) if that applies to you. Different legal business structures have their own tax requirements, so it’s important to stay up to speed.
Find more resources and advice for your business on our website, or check out our guide to hiring the right accountant for you.