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The Top Eight Must Do’s for Claiming Expenses

London, UK (20/07/2009)

It is your responsibility as the employer to inform HMRC of the value of the benefits and expenses you have provided. Claiming tax back on expenses can be a complicated business and, as the business owner, you are responsible for calculating it. How do you know what counts as an expense and what doesn’t? Can you be sure you have worked out what is due correctly? The Local Bookkeeper has put together a top 8 must do’s for business expenses.

1. Only claim for expenses that are genuine business related activities.

Business expenses are defined as expenses that are for business generating profits. As HMRC explain, you can only claim for expenses that are “wholly and exclusively” in the performance of your business. A business trip cost is a claimable expense, if it is a reasonable cost, like accommodation and dinner.
However, you may have some expenses that are shared with personal expenses like your phone bill; in cases like this, you can claim against the part that is for business calls.

You will need receipts for all of your claims to be processed. Without them, you will only be able to claim a maximum of £5 per day.

You will not also be able to claim tax back on occasions like business lunch expenses because it is seen to be a cost that you would have encountered anyway, had you stayed at the office.  In contradiction to this, you are actually allowed to claim on one Christmas lunch a year for a maximum of £150 per head so you have room to go a little crazy…

2. You can claim on travel that is “wholly and exclusively” for business but not from home to work.

You are able to claim up to 40 pence on every mile up to 10,000 on private cars and then 25 pence for every mile after that.  It is also possible to claim for the usage of a motorcycle at 24 pence per mile or a bicycle at 20 pence per mile.

But beware, though you can claim for parking and congestion charges, you may not claim for any parking fines you receive!

If you have any changes in the car benefits you provide, you must declare these to HMRC at the end of the quarter in which the change takes place, instead of the end of the tax year like other expenses and benefits, using form P46 (Car).

3 . Remember your business equipment and premises are capital items.

These cannot be counted as an expense.  Instead, they must be categorised under fixed assets and writing down allowances are calculated at the year end, to reduce your profits. You may be able to reduce your taxable profit but this depends on items you are claiming for. You should check this with your financial cornerstone. 

However, when your bookkeeper prepares monthly management accounts for you, they will calculate depreciation costs which, over the year, will reflect the writing down allowances that are calculated for the year end accounts.

If you work from home, you are able to claim back on your associated utility bills, like gas, electric, water, mortgage or rent, by the percentage of your home that is your designated office space. For example if you have a 5,000 square foot home of which 500 square foot is an office, you are able to claim 10% on your appropriate bills as a tax-deductible expense.

4 . Always hand in the correct completed forms to HMRC by 6th July every year.

This form will contain all the expenses for the year from each employee. This must be done
for all employees earning £8,500 and over including expenses and benefits and most company directors, you must complete a P11D form. You must pay Class 1 National Insurance contributions (NICs)to HMRC each month, all year round, together with PAYE.  Class 1A NIC’s are paid in a lump sum that will be declared on the P11D form and paid by 19th July or, if you are paying electronically by a preapproved method, 22nd July. 

If you have an employee earning less than this or a director who has no material interest in the company (i.e. controls less than 5% share of ordinary share capital and works full time or in a charity or non-profit organisation), you must complete a P9D form for each one. You do not need to pay Class 1A NICs for these employees.

5. Keep accurate records!

The rules are very strict and it can be likely that you will be asked to produce your records by HMRC. You must retain documents of when, why and receipts of the costs incurred for the last three years as well as the payments you have made. It is sensible that you keep these on an employee-by-employee basis.
 If you are not able to produce these records, you may be fined.

6. Check if your business could work more efficiently with a Dispensation

This is a notice from the HM Revenue & Customs that allows you to not have to declare certain expenses and benefits on a P11D or P9D nor pay National Insurance on them. This is designed for routine expenses or benefit for you are not liable for tax. To apply for a dispensation, you must complete a P11DX to HMRC at any time of the year and, once granted, they can take effect straight away if HMRC allows it to. Dispensations lasts indefinitely as well but you can expect to have a review of your eligibility every five years from HMRC. 

7. Check if your business could work more efficiently with a PAYE Settlement Agreement

This is a scheme where you will be able to place small/irregular items or those that are hard to value in order to settle any Pay As You Earn (PAYE) or NICs in a lump sum. They are designed to simplify the way you pay tax on expenses and benefits as you won’t have to declare these items on any employee’s form, payroll or pay Class 1A NIC’s at the end of the year. However, you will pay Class 1B NIC’s and calculating the tax due under this system can be complicated so you should consult your financial cornerstone to make sure you are doing it correctly.

To apply for a PSA, you will have to apply to HMRC who will issue you with a signed P626 form if the agreement is authorised. They are renewed on a yearly basis, unlike a dispensation , and you will have to resubmit the document that will be sent to you from HMRC each year if authorised.

8. Remember your deadlines!

Don’t risk receiving a fine from HMRC by missing these important deadlines of the tax year.

  • P11D and P9D forms must be received by 6th July
  • Issue your employee’s with a copy by 6th July
  • P11D(b) form of your total Class 1A NIC’s by 6th July
  • Pay your Class 1A NIC’s by 19th July or 22nd July by pre-approved electronic means

If you are ever in doubt then ask yourself this, ‘was this cost necessary to generate more profit for the business?’ if your answer is yes then it probably is a tax-deductible expense.

Although this advice is very helpful, if you are unsure about anything consult your financial cornerstone. You can also consult The Inland Revenue “Expenses and Benefits” Tax Guide here: http://www.hmrc.gov.uk/guidance/480.pdf



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