When you first start out in business, your likely to find plenty of people offering you the benefit of their wisdom in all kinds of areas. Much of it can be helpful of course, but on legal and financial matters especially, advice from non-professionals needs to be treated with a certain amount of caution.
In particular, we’ve found that tax is an area where business start-ups and the newly self-employed, who may need to submit a self-assessment tax return or personal tax return, can often receive misleading information from friends and family. While given with the best of intentions, setting out with an incorrect understanding of tax can lead to serious problems further down the line, so we thought we’d correct a few of the misconceptions we most frequently hear.
- I can get my business to pay for my holiday
While no one deserves a little rest and relaxation more than a hard-working business owner, there’s no way you’ll ever convince HMRC that your annual holiday is a tax-deductible expense.
An essential business trip that requires you to travel overseas and is purely business-focused is a different matter, but if you decide to tag on some holiday at the end, you’ll need to separate out business and personal costs.
And if you book a holiday and subsequently decide to combine it with business, you’ll only be entitled to claim for additional costs associated with visiting your client or supplier – you won’t be able to claim for any portion of your flights or accommodation.
- I can charge my workwear to my company
Many people think that because the kind of work they do requires them to wear a certain type of outfit – a smart suit, or black trousers and white shirt/blouse for example, they can claim tax relief on their work clothes. This is not the case, and the only exceptions are safety clothing and any clothing that is purchased wholly and exclusively to wear in the workplace.
As far as HMRC is concerned, if the clothing you have to wear to work can also be worn outside of work, it won’t be tax deductible.
The best way to prove to HMRC that clothing is wholly and exclusively for work is to have it branded with your company name and logo. Doing this makes the clothing a marketing expense, and it then becomes tax deductible.
- I’m home-based, so I can put all my household bills through my business
If you’re running your business from home, you can’t claim tax relief on all your household bills, but you can claim for a proportion of your expenditure on outgoings like heating, electricity, water, home insurance, and council tax.
How much you’re entitled to claim will depend on how much time you spend working at home, and whether the space you use is a shared room or a room dedicated solely to the running of your business.
As a rule, it’s not advisable to include mortgage payments in your expenses as this can lead to issues over Capital Gains Tax when you come to sell, but if you rent your property, you should include your monthly rental payments in your calculations.
- Because I’m running my business from home I don’t have to pay business rates
This is likely to be true if the work your business undertakes is of a general clerical/administrative nature, but it’s not the case for all home businesses. If you put signage up, have frequent collections or deliveries, or have customers regularly visiting you, your local council will see this as home trading, and you will be liable for business rates.
- I can claim tax relief if I entertain a customer or buy them a gift
You might want to curb your generosity. In most instances, any costs you incur in relation to customer entertainment and gifts can’t be offset against your tax liability (there are some exceptions, so it’s worth checking with your accountant), but of course, if you operate as a limited company, and you’re out of pocket personally because you took a client out for a drink or a meal, you are entitled to reimburse yourself.
As for giving gifts to customers, HMRC allows you to give a business gift worth up to £50 (including packaging) to any one person in any one tax year. To qualify, a gift must be business related, can’t be alcohol, food or tobacco, and must carry a conspicuous advertisement in order not to be classed as an entertainment expense.
- If I’m out of the office, I can claim food & drink as expenses
If you’re self-employed, you can only claim for a meal if it’s connected with an overnight stay, but if you operate as a limited company, you can choose to pay employees (including yourself) a fixed daily rate.
How much you can pay depends on how long you’re away from your office. Current HMRC allowances are £5 for breakfast; £5 for 1 meal (if you’re away for 5 hours), £10 for 2 meals (10 hours), and £15 for a late evening meal (if you finish after 8 pm having already worked a full day).
- My company Christmas party is tax deductible
We bring tidings of joy. In the spirit of Christmas, HMRC give an exemption from tax, national insurance and reporting on your staff party – so long as it is an annual event, is open to all staff, and the cost per head does not exceed £150 – if the per head cost exceeds this figure, it must be reported on an employee’s P11D, and may be liable to tax.
Only employers can take advantage of this opportunity – it is not applicable to sole traders.
- All my mobile phone costs are tax deductible
If you operate as a limited company, all business and personal costs associated with mobile phones supplied to employees are fully tax deductible, so long as the primary use of the device is as a phone – there are different rules for tablets and other devices. But if you’re self-employed, you’ll need to work out how much of your mobile usage is purely business, and you’ll only be entitled to tax relief on this figure.
- I can build a home office and get my business to pay for it
If you’re considering extending your property, creating a garden office/studio, or undertaking renovation work to create a home office space, you should seek professional advice from an accountant first. Large parts of the cost won’t be subject to tax relief because they’ll be counted as capital expenditure, and while some costs will be tax deductible if your business pays for building works, you may be liable for Capital Gains Tax when you come to sell your home.
- If I have a company car, I’ll get tax relief on all my motoring expenses
If you purchase a car through your company and use it for private as well as business use, HMRC will consider this to be ‘benefit in kind’, and the full value of the benefit will be added onto your annual income and liable for tax based on your personal situation.
The only way you can avoid paying personal tax is if you only use the car for business and keep it on the business premises overnight. If you declare business-only usage and HMRC discovers you are doing any private miles at all (including commuting to and from your place of work), you will find yourself in serious trouble. Also, if your vehicle is only insured for business miles, your policy will be invalid.
The rules on vehicles are different for the self-employed, and if you fall into this category you should seek professional advice.
- I don’t have to file my self-assessment tax return until the 31st January
It’s true that if you’re self-employed, the deadline for filing your self-assessment tax return is 31st January – but this is also the date by which you must pay your tax bill. The later you file your return, the more likely it is that your bill won’t be processed in time to arrive with you before it’s due to be paid, and you’ll find yourself facing a penalty for late payment.
Be aware too that if you want to have any tax you owe from other income deducted in instalments through your tax code, you need to file your return no later than 30th December.
Get the Best Tax Advice – Talk to Inca!
When it comes to advice about tax, or any other aspect of your business finances, make sure you get it from a professional. Here at Inca, we work with hundreds of micro and small businesses, helping their owners maximise profits by operating as tax-efficiently as possible.
Call us now on 0123 586 8888 and let’s have an initial chat!