Tracking these costs is a crucial (albeit sometimes complicated) part of running and growing your business – not least because it enables you to take advantage of tax relief on allowable expenses, so you only have to pay tax on your actual profits.

You might be wondering the best way to go about calculating and managing your business expenses and the good news is that you’ve got options if you’re a sole trader, and can work them out either based on the actual cost, or using a flat rate. The one we put under the spotlight here is the flat rate method.

Are flat rate expenses and simplified expenses the same thing?

Yes! The terms are sometimes used interchangeably, but they both refer to the same method of working out your expense claim. The name ‘simplified expenses’ was given to this method because it is, quite literally, a simpler way of doing things thanks to the easy flat rates that are applied.

How flat rate expenses are different to working out actual costs

Flat rate expenses are designed to streamline the process of submitting tax relief claims for a set amount of business-related costs each year. A good example of this is if you need to work out the cost of using a personal vehicle for work trips.

Using the ‘actual cost’ method means taking into account every cost you want to claim for, such fuel, insurance, and so on. Claiming a flat rate means you can multiply the number of miles you travel on your business trip by the flat rate which is set by HMRC for mileage.

Can anyone use the flat rate method?

Simplified flat rate expenses can only be used by sole traders or business partnerships that don’t have any limited companies as partners.

What can I use flat rate expenses to claim for?

There are three specific categories of business costs that flat rates can be used for if you’re self-employed:

• Living at a place of work
• Vehicle costs
• Working from home

We go into more detail about the rates and how to apply them below.

Flat rates for living at a place of work

If your business premises are also where you live, you can claim flat rate expenses based on how many people live at the property. The current rates are set at:

• 1 person: £350 per month
• 2 people: £500
• 3+ people: £650

Driving a business vehicle

If you have a vehicle that you use for business purposes (for example, you’re a mobile hairdresser who travels to meet clients), you can claim flat rate expenses on the miles you travel each year for work.

The flat rates for driving a business vehicle are currently:

• Cars and vans: 45p per mile for the first 10,000 miles you travel in the year, and then 25p per mile after that
• Motorcycles: 24p per mile

If you employ staff, they may also be able to claim these flat rate expenses, providing they meet the necessary criteria.

Working from home

Flat rate expenses are particularly handy for those who work from home for more than 25 hours a month. You can simply apply one of HMRC’s flat rates according to how much you use your home for work purposes or business-related activity.

The current flat rates for working from home are:

• 25-50 hours per month: claim £10 expenses per month
• 51-100 hours per month: claim £18 expenses per month
• 101+ hours per month: claim £26 expenses per month

It is important to note, however, that flat rates don’t cover internet or telephone costs when calculating expenses for working from home.

What are the benefits of using simplified expenses if I’m self-employed?

You have up to four years to apply for flat rate tax relief, so if there are any periods you’ve missed, go back and make sure you’re claiming all the relief you’re entitled to!

Using simplified expenses to work out your claim for tax relief does have some advantages:

• Less time and effort spent calculating and recording expenses means more time to focus on growing your business and striking a healthy work-life balance
• When the process is quicker and easier, there’s less chance of making mistakes – which is good news for the accuracy of your tax return!

Is it the best method for you?

Although there are many benefits, it’s important to consider whether claiming expenses using the flat rate method is the most financially efficient option for you.

It might be quicker and easier, but if your actual costs are considerably higher, then applying this method could mean you lose out on tax relief you’re entitled to.

The government has a handy calculator that can help you check whether or not flat rate (simplified) expenses will help save your business money.

Other ways to calculate expenses

When you don’t want to use a blanket flat rate method, or when you can’t, you can use what’s called the ‘costs method’, or ‘actual costs’.

When working from home, for instance, it means you have to divide your household expenses by the proportion which relates to your business so that you only claim expenses relating directly to work use.

For example, if you have a property with five rooms and one of those is your home office, a fifth of your property is used for business-related activity. So, if your electricity bill for the month comes to £500, you can only claim £100 (a fifth) as an allowable expense.

That said, it may be the case that using actual costs allows you to claim the most tax relief and operate your business in the most tax-efficient way.

We’d always recommend asking an accountant to help you figure out what the recommended course of action is for you.

 
Managing expenses can be tricky, especially if you’re new to running your own business. Check out our accounting support hub for more help, or to ask a tax question!

The post What Are Flat Rate Expenses? appeared first on The Cheap Accountants.

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. If you run multiple, separate businesses, you can charge costs between them – for example if one provides goods or services to the other.

Limited companies are separate legal entities in their own right, but even 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.

Be very careful to make sure you don’t claim the same expenses twice!

It’s crucial you only claim the proportion of an expense which relates to the specific business activity if you’re dealing with any expenses relating to both personal and business usage, or across multiple businesses. For instance, if you’re claiming expenses because you work from home, you’ll need to make sure you only claim the bit which relates to your business activities, and that each business only claims the portion which relates to itself.

How do I move an expense from one business to another?

The idea of charging an expense from one business to another can be confusing when you own both, but think about them as if they were two totally separate businesses, with different owners.

With that in mind, you’ll just need to charge the other business as if it were any other customer that you provide goods and services to – usually by creating an invoice.

Treating each business separately

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 because it could be seen as a way to reduce the amount of tax you pay overall, by moving expenses into the business where claiming them would have the most benefit. It can cause a lot of hassle and stress, and could 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.

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.

Separate records

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.

Bookkeeping software

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.

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.

The post Can I Claim Expenses from one Business in a Different Business? appeared first on The Cheap Accountants.

Some businesses also use referral incentives as part of their wider marketing strategy, rewarding clients who recommend them.

What are referral incentives?

A referral incentive is something you offer to an existing customer to encourage them to recommend your product or service to their network in exchange for a reward. This strategy turns your existing customers into brand advocates. For example, you might reward them with:

• Cash
• Account credit
• Gift vouchers
• Lower fees
• Money off
• Points in a loyalty scheme

The reward you offer for recommendations depends on the type of referral programme you want to run.

Do referral incentives work?

Recommendations from friends are often touted as one of the most reliable forms of advertising, with many of us allowing this to influence our purchases.

A global marketing study carried out by Radius suggests word-of-mouth is particularly powerful amongst millennials. This group placed word-of-mouth at the top of the list of what influences them when it comes to purchasing apparel, financial products, travel, electronics, and consumer packaged goods.

Is a referral incentive an allowable marketing expense?

Yes, referral incentives do qualify as an allowable expense which you can deduct from your profits before tax.

In short, including allowable expenses on your tax return means you pay less tax. Other allowable marketing expenses might include:

• Website costs, such as development, hosting, and domain name
• Print advertising
• Mail shots
• Free samples

Just be aware that entertainment and hospitality, on the other hand, are not allowable marketing expenses because they’re not business critical.

How to record referral incentives for accounting purposes

You’ll need to document the referral incentives you issue as part of your regular bookkeeping process. Experts at The Accountancy Partnership recommend the best way to do this is by setting up a new expenses category specifically for referral fees.

That way you can clearly see what it costs you (so you can check it’s worth it!), as well as making it easier to claim everything against your tax bill later. It’s just another reason why accountants are so keen on good bookkeeping!

Advice on managing a referral programme

Not sure whether you should be considering running a referral programme to help promote your business? We’ve gathered some of our top tips on how to run a referral campaign efficiently, and successfully.

Set clear goals around what you want to achieve

Are you looking to accelerate business growth? Perhaps you want to supercharge revenue? Maybe you’re searching for ways to improve customer retention? Whatever your goal might be, keep it in mind when you’re thinking about your referral scheme. It might affect what sort of incentive you offer, and who you offer it to. Some people might not offer the sort of brand rep you want!

Regularly report and review progress

Like any aspect of running a business, it’s essential to take stock of where you’re at on a regular basis, so you can see what’s performing well and what’s not. That way, you can adjust your strategy moving forward.

Setting up some sort of tracking for your referral campaign will show you the progress and success of each referral incentive. There are lots of ways to do this, such as issuing specific people with a discount code which identifies customers they’ve referred, or getting technical with unique referral links or coded URLs on your website.

This sort of tracking will also help you understand what a new customer is worth in comparison to the referral costs you incurred to engage them in the first place.

Involve your accountant in the process

Whenever money coming in or going out is involved, it’s always a good idea to ensure your accountant is involved too. Where referral incentives are concerned, they’ll be able to advise on what kind of reward is affordable and make sure you remain tax-efficient and compliant in the process.

Show your appreciation

Okay, so, a customer might be getting a nice little reward for any recommendations they make but still, it’s polite to show your gratitude for their efforts. Contact your referees to say thank you – it’s a small gesture that will have a big impact.

Are referral incentives the same as affiliate marketing?

It’s easy to see how referrals and affiliate marketing can be confused or used interchangeably because both use incentives to drive new customer engagement. When it comes to strategy and management, the two are quite different.

The main difference is the audience who drives this new engagement. While referral incentives call upon existing customers to entice their friends, family, and contacts to purchase your product or service, affiliate marketing campaigns rely on third-party activity.

This third-party comes in the form of brand advocates who are paid a fee to drum up business for you. Normally, the brand advocate will be recommending your brand to an audience which doesn’t know them in person, but who may be influenced by their opinion.

They’re often paid in commission, which comes from a percentage of each sale they directly motivate. This commission is something that can be agreed upon between you and any affiliate you deploy. Yep, this is how influencers make money!

Although it is a different form of marketing from referral incentives, the fees attached to any affiliate campaign you run will also be classed as an allowable expense.

 
Find more help in our guides and faqs, or ask a tax question for free!

The post Are Referral Incentives a Marketing Expense? appeared first on The Cheap Accountants.

For some employers, the huge list of things you might want to claim could include gifts for employees. Wanting to treat your staff from time to time is a lovely quality to have as an employer, but a lot of business owners aren’t sure where this leaves them in terms of claiming the expense against tax.

We’ll explain the rules for claiming the cost of staff gifting.

Do employee gifts count as an allowable expense?

In some cases, yes, presents you give to your employees are an allowable expense and you can claim tax relief on the value before tax. The rules are quite complicated though, with the outcome depending on what the gift actually is, its value, and who you give it to.

HMRC publish a list of expenses and gifts, and what businesses must do for each.

Gifts classes as ‘trivial benefits’ are usually an allowable expense.

Does it count as a trivial benefit?

A gift or small gesture to an employee can be classed as a ‘trivial benefit’. Something qualifies as a trivial benefit when:

• It costs the business less than £50 (including VAT)
• It isn’t a direct reward for employee performance
• It isn’t included within the terms of their employment contract – i.e., not something they’re obliged to receive. This includes any salary sacrifice setups.
• It isn’t cash or a cash voucher (gift cards qualify as long as they aren’t exchangeable for cash)

Where a gift meets all of these criteria, you don’t have to let HMRC know about it, or pay any tax or National Insurance on it.

If your business is a close company (a limited company controlled by five or fewer individuals), then an overall spend on trivial benefits in any tax year is capped at £300 per employee.

What happens if you spend more than the threshold for a trivial benefit on an employee gift?

You can still gift your employee a voucher that’s worth more than £50, but it will become taxable to both you and the employee under the benefits in kind tax rules.

The rule was introduced to make sure employers aren’t tempted to swap an employee’s pay for something of the same value – because this could help them avoid the tax and National Insurance which would otherwise need to be paid on the salary. To minimise the risk of this happening, if you buy a gift that exceeds the trivial benefit threshold of £50:

• You – as the employer – will be required to pay National Insurance on it
• Your recipient – the employee – will also be required to pay Income Tax on the value of the gift

You’ll need to report the benefit using your payroll software each time you run payroll and PAYE.

Does a cash bonus count?

Cash rewarded to staff in the format of a bonus will be counted as additional earnings on top of their standard salary. That means that PAYE tax and National Insurance will need to be paid through payroll.

Ways to show staff you care without spending money

If you’re working with a shoestring budget, or you prefer to dodge the hassle of working out if a gift is going to be an allowable expense or not, consider a non-monetary gesture instead.

You don’t have to splash the cash to show employees you appreciate them and that you’re grateful for their hard work. Here are just a few great ways to treat your staff without having to spend (much) money:

• An extra day of paid leave
• Flexible working hours
• An early dart on Fridays during the summer months
• An office party in their honour
• A parking space reserved just for them
• A long lunch
• Organise a staff games day on site
• Additional training and development
• Sing their praises (recognition goes a long way)

 
Hope this article answers all of your queries on the topic of staff gifts and allowable expenses. Got some more tax-based questions on your mind? Let us know!

The post Are Staff Gifts an Allowable Expense? appeared first on The Cheap Accountants.

You can only deduct costs if they can be classed as an allowable expense, so lots of business owners tend to miss out because they’re not sure what they’re allowed to claim for. In this article we’ll explore what allowable expenses you can claim tax relief on, and how this impacts the amount of tax you pay.

What kind of things can I claim as a business expense?

The golden rule any accountant or online guide will tell you is that you can only claim something as an expense if it wholly and exclusively relates to your business.

If you spend money on something but some of the time you use it for personal (non-business) reasons, then you’ll need to work out the portion of the cost which relates to the business, and make sure you only claim that. We’ll go over two of the most common examples, working from hom and travel expenses, below! HMRC also have a more extensive list of allowable expenses available online.

It’s important you know what you can claim for and how to calculate your expenses. Nobody wants to miss out on tax relief they might be eligible for, or to risk HMRC finding inaccuracies in your claim! Particularly for anything on the more unusual side of an expenses claim.

Allowable expenses relating to where you work from

You can usually claim most of the costs which relate to your business premises, such as a workspace you rent, or even the cost of using part of your home for business. These types of costs might include:

• Heating
• Lighting
• Water
• Rent payments
• Business rates
• Cleaning
• Property maintenance and repair

What about if I work from home?

Working out of a space which is separate to your home makes calculating this part of your expenses a bit more straightforward. The ‘wholly and exclusively’ business expenses rule gets a bit more complicated when you work from home.

You can still claim for your business expenses, but you’ll need to make sure you only claim the proportion which relates to your business activities.

Limited companies are only allowed to use the ‘proportional’ actual costs method, but sole traders have two options:

• Simplified expenses (otherwise known as flat rate expenses)
• The proportional costs method

Simplified (flat rate) expenses if you work from home

Simplified expenses are great for those who want a simpler way to work out their expense claims. You can’t use them for everything, but you can use them for things like using part of your home for work or travel.

To be eligible to use this method, you’ll need to be a sole trader, or in a partnership which doesn’t have any companies as a partner. You’ll also need to work from home for 25 hours or more per month. You simply claim your expenses through a flat rate outlined by HMRC, depending on how many hours you work from home each month.

• 25-50 hours: Claim £10 per month
• 51-100 hours: £18 per month
• 101+ hours: £26 per month

Calculate the actual cost of running your business from home

Using the ‘costs’ method means you’ll need to calculate the portion of your expenses which relate to business rather than personal use.

For example, if you have a house with four rooms and one of those rooms is your home office, a quarter of your property is used for business activity. So, if your electricity bill for the month comes to £200, you can claim a quarter (£50) of that as an allowable expense.

Things can become more complicated if there are multiple people using the same space for work. That’s why we always recommend seeking the help of a qualified tax accountant who will be able to clarify what you can and can’t claim!

Travel and accommodation costs

With regards to travel, you are allowed to claim:

• Travel and accommodation related to business
• Vehicle running costs including fuel, tax, insurance, maintenance, and servicing

You aren’t allowed to claim:

• Travel between your home and your regular workplace (for example, if you have an office or workshop separate to your home, you can’t claim the cost of travel to it as part of your regular commute)
• Initial vehicle purchases
• Meals outside of reasonable costs

For those self-employed with a mobile business, reasonable expense claims for journeys to and from a temporary place of work are permitted. So, for somebody who has to travel to a client’s premises, such as a plumber or a hairdresser, they are able to claim the cost of this journey as an allowable expense.

There’s a limit on how long you can claim travel expenses for if you’re going to the same place

Remember how we said you can’t claim the cost of your usual commute, but you can claim your expenses for legitimate business travel? This is where the 24 month rule comes in.

The rule means you can claim the travel costs as long as the intention is that it will be for no more than 24-months. So, if you start out on a 3-year contract, the intention is that this will be longer than the allowable 24-month period, and you won’t be able to claim.

Working out travel costs

Just like working from home, you might be able to choose between using either the simplified flat-rate mileage method to claim your travel expenses, or working out the actual costs.

The flat rate (45p per mile for cars, for the first 10,000 miles, and then 25p per mile after that) is easier, and means you’ll only need to keep mileage logs of each journey.

Using the actual costs method required much more detailed tracking of things like fuel, insurance, and repairs, but it can be worth the effort if the amount you can claim for is considerably more than what you could claim using flat rates.

 
Managing your allowable expenses for Self Assessment can be complicated, especially if you’re not familiar with the dos and don’ts. Check out our accounting support hub for more help, or to ask a tax question!

The post What Are Allowable Business Expenses? appeared first on The Cheap Accountants.

We’ll guide you through what expenses are and the types of things you can claim tax relief on when running an ecommerce business. This includes pre-trade expenses, because the sooner you start saving money, the better.
 

What are expenses?

Expenses are costs your business needs to incur in order for it to run effectively. For example, purchasing stock and packaging, paying for storage space, the cost of running your ecommerce website, and potentially hiring freelancers or staff.

When it comes to claiming expenses for tax relief purposes, you can only claim for those that HM Revenue & Customs (HMRC) deems an ‘allowable expense’.
 

What are allowable expenses?

As the name implies, allowable expenses are the business costs that HMRC allows you to offset against your taxable turnover.

To claim these expenses for your ecommerce business, they must also comply with HMRC’s rule that they are ‘wholly and exclusively for business use’.

Some allowable expenses are more obvious than others, like the products you purchase for your inventory. Things start to get a bit more complicated when you have costs that are divided between professional and private use such as working from home, your phone bill, or fuel.
 

What type of expenses can my ecommerce business claim?

Many different costs qualify as allowable expenses for different types of business but let’s focus on the ones most relevant to an ecommerce business.
 

Business insurance and other legal fees

Whatever the associated costs of business insurance and business-related legal fees, most of these will qualify as tax-deductible allowable expenses.

Remember, these can only be costs related wholly to the running of your business. Whatever you do, don’t try and hide personal insurance or legal fees in amongst your business costs. This could land you in hot water with HMRC and no taxpayer wants that.
 

Home office

If you work from home and use your home as a base for your ecommerce business, you can claim a proportion of these costs as expenses. This includes your phone, internet and utility bills.

Calculating expenses if you work from home can be tricky because it’s usually helpful to work out precisely how much you spend for business versus personal use, so you can use the method which is most tax efficient. You could calculate your expense claim for working from home with either:

• Simplified expenses (also known as the flat rate method)
• Cost method

An office or co-working space

If you use a co-working space or you have business premises (e.g. an office), you can claim the following as allowable business expenses:

• Rent and/or booking fees
• Office supplies and equipment
• Utility bills

Website running costs

As an ecommerce business, your website is a monumental part of your business, but it can get a little expensive. Fortunately, you can claim for a lot of the related expenses, including:

• Domain
• Web hosting
• Business email
• Technical support
• Software and hardware

Hiring freelancers or staff

If you’re hiring freelancers on temporary projects to help build your brand and set up your business, you could be able to claim tax relief on these costs. You might hire a freelance graphic designer to build your brand guidelines, for example, or an ecommerce photographer to snap and edit your products. If things get really busy, you might hire an employee to pack orders.

Watch out for IR35: If the relationship between you and your freelancer/contractor is more like employer and employee, you may be breaking IR35 regulations.
 

Mileage and travel

If you have to travel around for business, you’ll probably be allowed to claim:

• Travel, tickets and accommodation wholly for business-related activity
• Vehicle running costs (fuel, tax, insurance, maintenance and servicing)
• Food and drink which relates to the business trips you need to make – and only then within reason!
• Parking and congestion charges
• Tickets or admission for events (e.g. conferences and trade shows)

However, you aren’t allowed to claim:

• Travel between your home and another workplace that you expect to use for more than 24 months (e.g. an office or co-working space)
• Food and drink if it relates to things like client entertainment – or your weekly shop!

Training and learning

If you invest in training, learning and upskilling for the benefit of your ecommerce business, the costs can qualify as allowable expenses. This includes:

• Training courses
• Subscriptions to learning platforms or resources
• Books or online guides

Accounting fees

If you pay for bookkeeping software or you hire an accountant, the related costs qualify as tax-deductible. For those ecommerce businesses not fully set up yet, this also includes your initial company registration fees.
 

Cloud storage

As an ecommerce business, you’ll have a lot of information, digital assets and data that you’ll need to store somewhere. Many ecomm biz owners choose cloud storage as the perfect solution – which qualifies as an allowable expense!

What are pre-trade expenses?

Pre-trade expenses are the costs required to set the business up before you even start trading or make your first sale. This is particularly relevant for ecommerce businesses as often you’ll need to invest in stock before you can start selling.

Typical examples of pre-trade expenses include:

• Legal fees
• Accounting and bookkeeping costs
• Inventory
• Equipment
• Renting or buying business premises
• Your website and all the associated costs (e.g. domain)
• Insurance
• Marketing, branding and advertising
• Market research
• Recruitment or outsourcing
• Uniforms and protective clothing

This type of expense can also include assets you already owned before starting your business, such as a laptop or desktop computer.

What qualifies as a pre-trade expense?

Pre-trade expenses are expenses that:

• Would’ve qualified as an allowable expense if the business was up and running
• Were made wholly for business and trading-related purposes

It’s important to note that these costs must have occurred no longer than seven years pre-trading.

Pre-trade costs you can’t claim as expenses:

• Training courses
• Business premises maintenance
• Fines or penalties
• Business licenses
• Entertainment

Do I need an ecommerce accountant to help me claim expenses?

No – any qualified accountant will be able to help you identify, record and claim your allowable expenses to keep your tax bill down.

So, if you’re already working with an accountant who you know and trust, sticking with them is fine. However, if you’re looking for a new accountant for your ecommerce business, there are benefits to choosing one that has targeted experience in your niche.

For example, they’ll understand the nuances of your sector and they’ll be acutely aware of the specific rules and regulations for ecommerce businesses to keep you compliant.

Whether you choose to work with an ecommerce specialist or not, we’ve got you covered with some tricks and tips on finding and hiring a good accountant.

 
Looking for further support for your business? Head over to our info hub, where you’ll find a whole host of helpful resources.

The post What Expenses Can I Claim for my Ecommerce Business? appeared first on The Cheap Accountants.

Many self-employed people work from home, enjoying the flexibility without needing to pay for extra work space, but this does mean household bills can mount in relation to business use.

Claiming allowable expenses on home utilities directly related to your business operations is an efficient way to reduce your tax bill – but what about VAT?

Here, we take a look at the kinds of bills you can reclaim VAT on if you run a VAT-registered business from home.

Claiming VAT on bills when working from home

The great news is that you can reclaim VAT on certain costs when working from home, provided your business is VAT-registered.

This means the cost in question needs to be directly related to the operation of your business, even if it’s only part of the full bill or expense.

For example: You have five rooms in your house and your home office is one of them, so your home workspace takes up roughly 20% of your floor space. This means you can reclaim VAT on 20% of applicable bills and expenses.

Plus, if your business incurs additional costs as a result of you working from home, whether partially or full-time, you can reclaim the VAT on these too, along with a proportion of your home workspace running costs.

This includes things like:

• Office furniture
• Some decoration costs
• Security expenses associated with protecting sensitive data
• Some office cleaning and maintenance costs

You will need to be able to prove that the costs you’re looking to reclaim VAT on are a ‘fair and reasonable’ part of running your business. The best way to do this is by maintaining thorough financial records and storing valid VAT invoices, receipts, and other relevant paperwork.

How do I reclaim VAT on work-from-home expenses?

You can claim VAT on allowable expenses through your VAT submission, but there are a few specific things to know depending on how your business is structured.

Limited companies and directors

If you are registered as a limited company and want to reclaim VAT on qualifying home-work expenses, you need to ensure the costs are paid by the business and in the business’s name. This is because the company is a separate legal entity to you as an individual, so it can be a bit complicated.

You might instead claim your expenses back as a company director, with the company reimbursing you for the cost.

Sole traders and partners

If you are registered as a partner or sole trader, HMRC counts your personal finances the same as your business finances. So, you’ll just need to be able to identify and prove what proportion of costs incurred are directly business-related for VAT purposes.

Don’t forget: In order to reclaim VAT on bills if you work from home, you need to be a VAT-registered business. This applies no matter how your business is registered or legally structured.

Registering for VAT

VAT registration is compulsory if your taxable turnover meets the legal threshold, which is currently £90,000 within a 12-month period.

You can register for VAT online or by post and the process is pretty simple. You’ll just need to make sure you have the following to hand before you start:

• Your Government Gateway login details
• Business registration details
• Business bank account details
• National Insurance number or Unique Taxpayer Reference (UTR) number

If VAT registration isn’t mandatory for you just yet, there is still an option for you to register for VAT voluntarily.

Voluntary VAT registration

Some business owners choose to register for VAT voluntarily, even if their current VAT taxable turnover hasn’t yet reached the official threshold of £90,000.

There are a number of reasons why a business owner might opt for voluntary VAT registration, including:

• If you pay for goods or services with VAT added on top (e.g. accountancy or legal fees) you can claim back the VAT you pay. This is known as ‘input tax’
• If your input tax exceeds your ‘output tax’ (the VAT you’ll be required to charge your own customers), you can reclaim the difference. So, if you pay VAT on a regular basis but don’t charge it very often, voluntarily VAT can be a great way to become more tax-efficient.
• Being VAT-registered can help make a business appear larger, more established, and more reputable. This gives new and existing customers confidence in you and also helps you stand out against the competition.
• You are able to backdate claims for goods for up to 4 years and services for up to 6 months prior to your VAT registration date once you’re registered, as long as you’ve kept detailed records and the necessary paperwork.

Sometimes, your accountant may even recommend that you register for VAT before it becomes compulsory.

However, it is important to note that if you do choose to register for VAT voluntarily, you will still need to follow the same processes and comply with the same deadlines as those under compulsory VAT registration.

In other words: just because voluntary VAT registration is your choice doesn’t mean this gets you off the hook with filing VAT returns.

So, if your VAT taxable turnover is still below the threshold and there’s no real reason for you to register for VAT, you might prefer to save yourself the headache – at least for the time being.

 
Are you looking for more expert business support? Head over to our info hub for more news and helpful resources.

The post Can I Reclaim VAT on Bills if I Work from Home? appeared first on The Cheap Accountants.

Even though taxes themselves cannot typically be written off, the good news is that there are a whole host of other tax-deductible expenses that can help you save money.

We explore some of the most common allowable expenses you could (and should) be claiming when you submit your tax return.
 

Tax relief on business expenses

Your business will be subject to running costs no matter what its size or scale. To help you offset some of these expenses, you can exclude them from your taxable profit and reduce the amount of tax you need to pay.

However, you can only exclude costs if they officially qualify as an ‘allowable expense’ which are incurred “wholly and exclusively” for the business. Deducting these from your income reduces your profit figure (which is what you pay tax on).
 

Qualifying allowable expenses

Tax might not be something you can claim relief for as part of your taxable income but there are many other allowable expenses for you to take advantage of.

Many business owners miss out on valuable tax relief because they aren’t sure which expenses count as being allowable and which are.

There are specific deductions designed for working from business premises as well as for those working from home, so there are plenty of options to explore, whatever your circumstances.
 

Business expenses you can offset:

Common business costs that typically qualify as allowable expenses include:

• Business premises: Such as rent and utility bills, but not the costs relating to purchasing the property itself.
• Items bought with the intention to sell: If you buy anything in order to sell it on for a profit then it may well qualify as an allowable expense. Typical examples include stock, merchandise, and raw materials.
• Daily office running costs: Stationery, postage, printer inks, etc. – these are all great examples of revenue expenses.
• Employees: Salaries, bonuses, pension contributions, staff perks and gifts. This might also include the cost of reimbursing employees for expenses – for instance, a train fare if they travel to a client meeting.
• Travel: Fuel and mileage for business-related travel, as well as travel tickets and parking costs. Travel expenses also include things like hotel stays, food, and drink (during work-related hours and activities). However, travel deductions don’t apply to day-to-day commuting.
• Vehicles: Vehicle expenses can be pretty complicated. The rules differ depending on whether you own the vehicle personally or through a limited company. It also depends on whether the vehicle is standard, hybrid or fully electric. There are also multiple ways to calculate your vehicle expenses – just to complicate matters even further!
• Marketing and advertising: This includes website running costs and print advertising, as well as digital marketing costs such as paid ads and influencer fees.
• Legal fees and professional services: If you hire an accountant or a solicitor for your business, you can claim tax relief on the costs related to this. This also applies to costs you incur for various insurance policies.
• Clothing: This includes uniforms or protective clothing that you or your employees are required to wear when carrying out your work. This could be for safety or performance reasons, but also for advertising purposes too.

Allowable expenses when working from home

With more people working from home than ever before, these types of allowable expenses are invaluable.

Common allowable expenses if you use your home as a place to work or to run your business include:

• Lighting
• Gas and heating
• General maintenance – but only in rooms that are specifically used for business activity
• Mortgage interest payments
• Council tax bills
• Internet and telephone costs
• Water – but only where use is substantially and directly related to business operations (e.g., a hairdresser who relies on a water supply in order to provide their services)

The only important caveat to note is that any costs being claimed for deductions need to be directly related to the running of your business. That means, for some outgoings, you may only be eligible to claim for a portion of the cost.

For example, if you use your mobile phone for personal calls as well as communications relating to your business, you are only allowed to claim relief on the business-related element.
 

The best way to calculate allowable expenses

Deductions can reduce your overall tax liability and help protect your cash flow – but it’s essential to calculate your allowable expenses accurately to ensure you don’t end up underpaying or overpaying tax.
 

Simplified expenses

Simplified expenses are a method of calculating business expenses using flat rates rather than having to meticulously work out your actual business costs.

This is designed to make recording costs and claiming tax relief easy because you don’t need to go through the painstaking process of dividing your personal expenses from your business expenses.

It’s particularly handy for those claiming expenses for working from home as there’s no need to figure out and separate personal and professional use of things like the internet and mobile phones.

However, you can only use simplified expenses if you work for 25 hours or more a month from home.

Plus, simplified expenses can only be used by sole traders, not limited companies or business partnerships involving a limited company.

Those who don’t use simplified expenses generally use the cash basis accounting or accrual accounting methods instead. These are more complicated as personal and business costs need to be clearly divided.
 

Understanding what you can claim

The trading allowance is the amount that you can earn from self-employment or miscellaneous sources in a tax year before you need to report it to HMRC and pay tax. If you go over the £1,000 trading allowance threshold then you’ll need to sign up to send tax returns, but you can still offset the allowance against your earnings, and reduce your tax bill.

It’s important to note that you aren’t allowed to claim the Trading Allowance and tax relief on your expenses at the same time.

You’ll need to choose one or the other – so go for the one which gives the biggest reduction!

 
Looking for more expert business support? Head over to our info hub for more news and helpful resources.

The post Is Tax a Business Expense? appeared first on The Cheap Accountants.

It happens to the best of us, but the good news is there are often ways to reduce costs. We have some tips to help you snip any unnecessary spending in your business faster than you can say Edward Scissor Hands.
 

Check your finance reports

Regularly reviewing your financial reports is like a full MOT for your business. You can see the condition the business is in, highlight any issues, and identify your most valuable assets and resources. Looking at your business under the microscope will help you to both understand your business more and make effective cost cuts.

Fortunately, creating financial reports can be much less complicated than you may think, particularly if you use bookkeeping software. This can help you:

• Stay up to date with what’s what: Know exactly what your income and outgoings look like and identify any hidden costs such as forgotten subscriptions.
• Plan for your future growth: You’ll be able to spot trends and set realistic targets based on the data you have.
• Make better business decisions: Over time, you’ll be able to make more effective decisions. Good data leaves less room for guesswork!
• Delve deeper into your finances: Get to know your finances like never before. Understand which clients pay on time and identify any late payers who disrupt your cash flow. You can also manage your costs, for example, by monitoring specific purchases or tracking your energy bills.

Look at your energy costs

Is there anything your supplier can do to help trim down your energy bills?

Not a lot of people know that energy companies actually offer businesses grants and schemes to help reduce bills by making you more energy efficient. Have a chat with yours to see what they offer and if they don’t provide any help or give you advice – look elsewhere! Check out Ofgem for more details.
 

Don’t be afraid to haggle to reduce your costs

We’ve all haggled at some point in our lives, whether we’re trying to get a better phone deal, or make an offer on a property. The people who do it best, are always the jammy ones with the best deals.

If you’ve been with a particular supplier for a while, whether that’s your energy supplier or your accountant, if you don’t feel like you’re getting the best deal possible, have a chat with them. Nothing is more valuable than loyal customers, so get your haggle on at once – that is an order. Remember: If you don’t ask, you don’t get!
 

Check your subscriptions

It is unbelievably easy to take on a bunch of subscriptions that cost a few pounds a month here and there, but before you know it, you’ve racked up hundreds of pounds a month on stuff you no longer use.

Do you still need the three different types of photo-editing software you signed up for last year? Letting this sort of thing pile up can really drain your profits. Ask yourself:

• Is this still beneficial to my business?
• Are there any free alternatives?
• Can I find one subscription that does all (or most) of what I’m getting out of the subscriptions I currently have?

There are almost always free alternatives to take a look at, or software that gives you multiple features in one, so you can keep on top of what’s what.

And remember, some software charges you per user, so if someone leaves or changes their role, make sure to remove them or give access to another member of staff.

We’re using subscriptions as an example, but it’s good practice to really scrutinise each transaction going out of your business. Some of your spending might be there simply out of habit.
 

Allow remote working

If you employ staff, is it worth considering offering them flexible working? Home working = less energy used in your workspace = money saved.

We get that working together in an office can be much better for collaboration, but letting your employees work just one day per week from home could make a big difference to your energy bills.

It also gives your employees more flexibility, which many studies have said makes them happy and more productive!

You might even decide to ditch the office space altogether, although we get that it’s not a suitable suggestion for every business.
 

Use freelancers

Sometimes you’ll have bits and bobs that need doing, like a particular project or something you need ongoing support with, but is it enough work to justify hiring a full time, permanent employee?

Outsourcing to a freelancer means you pay solely for the work/projects you need, which cuts down your costs, and you won’t need to think about the extra expense of making employer’s pension and National Insurance contributions either.

You can find freelancers with various levels of experience for a price that suits your business.
 

Get practical advice

If you’re really stuck on where to cut costs, speak with your accountant. They’ll take an expert look at your finances, and usually advise you on where you can save money, be more efficient, or claim tax relief to ease your bills.

Find more tips and advice for your business on our website, or tap into our guide on hiring the right accountant.

The post Cost Cutting Tips for Businesses appeared first on The Cheap Accountants.

This time of year is really popular for people to become new business owners, so we wanted to give newbie freelancers a helping hand.

The main things to consider are:

• Income tax
• National Insurance Contributions
• Business expenses
• Self Assessment
• Bookkeeping

If you’ve never had any experience with these things before, don’t panic! This blog post will hopefully clear a few things up for you.
 

Income tax

Let’s start with the main one. Income tax is the same kind of tax you pay as an employee through PAYE, but if you become self-employed, you’ll have to do it differently. It won’t directly come out of your earnings, you’ll have to work it out and do it all yourself.

The percentages are the same as with employment. So, it’s 20% for earnings between £12,570 and £50,270. Between £50,270 to £125,140 is 40% and over that, it’s 45%.

However, please note that these figures can change at the start of a new tax year (every April) – so always check for up to date figures!
 

National Insurance

This is slightly different when you go self-employed. As an employee, you will be used to paying Class 1 NI. However, now it’ll be Class 4.

Class 4 is for profits over £12,570 and under £50,270. This is set at 6% of profits. For earnings over £50,270 it’s 2%.

National Insurance is something that will need to be put on your Self Assessment tax return, along with all details of your income, for Income Tax purposes too.
 

Expenses

Now for the good news. You can reduce your profit figures – but this is a good thing!

If you’re paying a percentage of your profits in tax, naturally having a lower profit figure will equal less tax to pay.

A lot of people get a bit apprehensive about this bit but don’t worry. We’re not talking about dodgy tax dealings, this is just a legitimate way to ensure you’re not paying more tax than you need to. Every business does it, and HMRC expects you to claim for expenses.

Basically, anything you earn that you spend back on the business is not profit. It’s an expense and should therefore be deducted from your profits.

The way it works is: Earnings – expenses = profit

So, it’s really important you keep track of all business expenses and keep receipts and invoices, should HMRC ever ask for them. Just make sure what you’re claiming for is solely for the purpose of doing business. Anything that doesn’t look right could spark a HMRC investigation.
 

Self Assessment

This is how you record all your income and expenses for HMRC. You will need to submit a Self Assessment tax return by January 31^st each year and also pay what you owe by then.

Please don’t wait until the deadline to get everything done though!

First of all, you’ll need to register for Self Assessment. This needs to be done by October 5^th in your business’ second tax year. It can easily be done online on the government’s website.
 

Bookkeeping

In order to keep track of all your incomings and outgoings, you’ll need to put a bookkeeping system in place. A lot of people still swear by spreadsheets, but we’d definitely recommend trying out some bookkeeping software instead.

Modern bookkeeping software will automate a lot of processes for you, which saves time and reduces errors. Having cloud-based bookkeeping is also handy if you’re on the move a lot because you can access things remotely.

Overall, things are easier than they sound. The most important thing is to get organised and read up on what you need to do. Make sure you keep good records and do everything above board, and you’ll keep on HMRC’s good side.

Do you have any questions about the information above? Are you looking for an accountant who can handle it all for you? Get a free quote for low-cost accountancy services.

The post A Newbie Freelancer’s Guide to Tax, NI and Expenses appeared first on The Cheap Accountants.