24 January 2020
UHY Hacker Young’s Corporate Tax director, Nikhil Oza, gives advice on how to navigate the complex world of tax deductions, as part of our Accounting for SMEs Q&A series.
Are there any tax deductions that small businesses miss? What’s the most common mistake you see there?
After 15 years of dealing with small businesses, I think the most common expenses that can be overlooked are:
Travel and subsistence expenses – The costs associated with travelling on business and grabbing a quick bite to eat is an allowable expense. I would also think about whether you use your own car for business trips and if you should be claiming mileage expenses. Alternatively, you might think about purchasing a new car in your business which can have tax advantages, especially if it is an electric car – just be sure to think about any potential benefits in kind (or better yet, ask your accountant to think about them!).
Staff parties – In most businesses, your staff play a vital role in keeping the business running and so why should you be penalised if you want to throw a big Christmas or Summer party for them? The good news is that such parties are fully deductible if the party is just for staff members, although there could be a benefit in kind if the cost is more than £150/head.
Home office expenses – Small business owners that regularly work from a home office can claim a small tax deduction of £4 a week without having to provide itemized bills, receipts and other documentation. Larger amounts based on a proportion of household bills can also be claimed, for instance where a business owner has set aside an office or other room for business purposes, but there could be a reduction in the Private Residence Relief available if that individual ever sells their home, so care is needed here.
However, a key expense to remember is your family. And by that, I don’t mean your spouse’s spending habits! But rather, where a family member is contributing to your business, perhaps by answering business calls or doing paperwork, it could be in your interest (and theirs) to pay them a nominal salary, which would be fully deductible for tax purposes and if they have no other income, likely to be within the personal allowance threshold and thus tax-free.
I’ve avoided claiming deductions because I don’t want to get audited. What proof do I need to claim deductions? How long do I have to keep my records for?
Firstly, as long as you have not claimed for anything debatable, you should have nothing to fear from an audit or what HMRC would refer to as a “compliance check”. It is perfectly legal to deduct genuine business expenses and if you are unsure you should probably refer to your local accountant for help. The tax savings will hopefully outweigh any fees the accountant might charge you.
You do not need to send in proof of expenses when you submit your tax return, but you should keep proof and records so you can show them to HMRC if you are ever asked.
The type of proof depends on the type of deduction. For instance, if claiming for employee costs, then you would need to keep appropriate PAYE records (such as salary paid, deductions made, tax code notices, taxable benefits, etc.). If claiming for legal fees, then you would need to keep the invoices issued to you by the lawyer/solicitor.
If you are self-employed, then you must keep your records for at least five years after the 31 January submission deadline of the relevant tax year. For example, if you sent your 2017-18 tax return online by 31 January 2019, you must keep your records until at least the end of January 2024.
As a self-employed professional, what kind of financial records should I keep and how long do I need to keep them for (i.e. in case of an audit)?
You must keep your records for at least five years after the 31 January submission deadline of the relevant tax year. For example, if you sent your 2017-18 tax return online by 31 January 2019, you must keep your records until at least the end of January 2024.
HMRC may open an enquiry into your tax return and it is important to have complete records to show how you calculated your tax liability. They can charge a penalty if you fail to produce complete records when asked.
You’ll need to keep records/proof of:
- all sales and income (e.g. sales invoices, till rolls and bank slips)
- all business expenses (e.g. receipts and invoices for your purchases, goods and stock)
- bank statements and chequebook stubs
- VAT records if you’re registered for VAT
- PAYE records if you employ people
- records about your personal income
If you’re using traditional accounting (see our Back to Basics blog for cash-basis vs traditional accounting), you’ll also need to keep records of:
- what you’re owed but have not received yet
- what you’ve committed to spend but have not paid out yet, e.g. you’ve received an invoice but have not paid it yet
- the value of stock and work in progress at the end of your accounting period
- your year-end bank balances
- how much you’ve invested in the business in the year
- how much money you’ve taken out for your own use (i.e. your drawings)
There are no rules on how you must keep records. You can keep them on paper, digitally or as part of a software program (like book-keeping software). However, if you are subject to the Making Tax Digital requirements for VAT, then you would likely be keeping your records in a digital format. Your accountant should be able to take care of this for you if you wish.
We will be posting the next in our Accounting for SMEs Q&A series shortly so watch this space! Our next piece will focus on tips and tricks of the trade.
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