British businesses sometimes miss a trick when it comes to claiming business expenses. Being too cautious with your expense claims could cost you money in unnecessary tax, but it’s important to know where to draw the line. We explore which expenses pass, and which have gone too far.
Business expense claims that went too far
First, let’s examine what not to do. While there’s certainly a level of flexibility around what expenses you can claim, there’s a clear line that you just can’t cross.
Every year, HMRC releases a list of the most optimistic expense claims. Amongst the most brazen is a claim for luxury watches for staff christmas presents…for a company with no staff. Underwear for personal use was also high on the list of ludicrous claims, alongside a garden shed, plus costs for the space in takes up in the garden.
The most outlandish claim Black and White accounting have experienced is £10,000 of expenses for a client’s daughter’s wedding. A herbal viagra substitute was a close second.
One of Morgan Jones’ clients really went out on a limb when they tried to claim expenses for an artificial leg, recorded under ‘sundries’.
Ruth Owen, HMRC Director General of Customer Services, said:
“Year after year we receive a number of ludicrous expense claims, ranging from international holiday flights to expensive designer clothing, which we would never uphold. Why should the honest taxpayer pick up the bill for others? HMRC will only accept those claims which are genuine, such as legitimate travel expenses or the cost of tools for the job.”
So, what can I claim as a business expense?
Generally, you can claim against anything that is used purely for your business. There are a range of typical business expenses that are pretty black and white, meaning you can definitely claim and you won’t get caught out. These include office supplies, travel to client meetings, employee wages and the cost of business premises. For more information check our our guide to the most typical small business expenses.
For more unusual expenses, there’s something of a grey area:
Business trips and holidays
This is an area where there’s often confusion. To clarify, here are some scenarios.
You can’t turn a holiday into a business trip
Business and pleasure just don’t mix! When you go on holiday, the purpose of the trip is personal and must be kept as such. You may spot an opportunity for some business while you’re there, but you can’t change the purpose of your trip to suit this. Therefore, you can’t claim any costs incurred while doing business on your holiday. To claim expenses on a business trip, the initial purpose of the trip has to be business.
You have leisure time on a business trip
Let’s say you’re on a business trip somewhere and you decide to use the spa at the hotel. It doesn’t incur any extra costs but you do have a rather lovely time. This doesn’t mean you’ve ruined your opportunity to claim back.
As long as the original purpose of the trip is still business, you can claim the whole amount through the business. Spa time has arisen as an incidental benefit from the main purpose.
You extend a business trip
Perhaps you want to extend your business trip to take in some beach time, or for another day in the spa. It’s a great myth that you can’t claim any of the costs back because the trip has ‘dual purpose’. If the trip is primarily for business, the only cost you can’t claim back is for the extra day(s). Let’s say the trip cost £1500 and the extra day cost £300. You can claim the full £1500.
Top tip: Record everything in your business meeting minutes to ensure the main purpose of all trips is well documented.
Generally, HMRC don’t allow you to claim expenses for entertainment (like food and drink). However, there are certain criteria that if you meet, you can claim against.
You’re allowed to claim £150 a year per employee for entertainment.
This applies even if it’s just yourself. Even if it’s just yourself, as director of a limited company, you can still claim this expense against your income. This is because you (the director) are classed as an employee. If you are a sole trader, you cannot claim expenses on entertaining, even at Christmas. This is because you are not an employee of your business, you are your business.
Say you know someone in your industry who is more knowledgeable than you. You take them out for lunch to pick their brains on a specific topic and you offer to buy their food in exchange for their insight. You can claim this as an expense, even though it appears as entertainment.
Top tip: When entertaining, play it safe. The general rule of thumb, especially for sole traders, is if you are close to your base, you can’t claim for meals. If you’re partaking in an exchange, ensure the details of this are clearly recorded.
Subsistence versus entertaining
Subsistence includes anything you need to sustain yourself while carrying out business away from your office or day-to-day duties. This includes:
- Taking clients or suppliers out for lunch. This has to be away from your base, however, as there has to be travel involved when claiming against subsistence.
- You are staying away on business and claiming a meal for yourself or your employees.
- You are staying away on business and are claiming against any beverages (within reason) you may need such as coffee and water.
Top tip: Consider the proximity of your dining experience to your work base. When you’re away on business, you can claim anything you need to sustain yourself and your employees.
Potential business expense claims that may surprise you
To make the matter of expense claiming that bit more complicated, there are some surprising business expenses that you could potentially claim. These include tennis coaching, child care, health insurance and company cars, that could count as employee benefits.
For example, your company can pay for school fees as a benefit. You’d then have to pay Class 1 National Insurance contributions on the cost of the fees. As an employee, you’ll also have to pay either 20 or 40% tax on this. The company can then claim the cost of this benefit against its income.
Now you understand what you can and can’t claim, make business expense claiming as simple and efficient as possible. Discover how to enter expense receipts and invoices in Quickbooks online.