When it comes to business finances, expenses just sort of…come with the territory. Often playing second fiddle to profit, revenue and margins, they’re rarely seen as a contributor to the overall success of a business.

The thing is, how you manage expenses can seriously impact profitability. When you don’t claim allowable expenses, or spend business cash on items you can’t claim for, your bottom line pays for it. And, since you can’t backdate them*, if you miss out, you really miss out (and boy, does that add up over time!).

The sooner you work out what you’re eligible for, the sooner you can maximise available tax relief. There will be more cash in the bank.

 

What’s the right way to pay for expenses made on behalf of my company?

Your company’s expenses can be paid in two ways, either straight from the company bank account or out of your own pocket and reimbursed by the business. For expenses reimbursed to you, directors can refund themselves at any time, but must keep the receipts to justify and back-up the expenses come tax season.

 

What is the best system to use when processing expenses?

It all comes down to keeping good records. It may sound obvious, but a lot of directors don’t keep track of what, where, when, why and how they “bought that thing”. They might keep hold of some of this information but if they don’t have all of it they won’t be able to back up their claim with HMRC.

Here’s what “keeping good records” looks like.

Track it now, not later

Forgotten expenses e.g. items your business pays for but are not properly tracked, can really add up over time. Track the payment as soon as you can, so you don’t need to think about it again. Nowadays there’s brilliant receipt capturing software (we recommend Dext), meaning you can upload it straightaway. Life moves fast, if you’re relying on hardcopies chances are you’re going to lose a few! The sooner you go digital the sooner it’s in the cloud and off your to-do list.

Correctly reconciling

Make sure you’re assigning each payment to the right expense category e.g. travel, sustenance etc. If you use finance software, we recommend Xero, categorising correctly will save hours of retracing steps and finding receipts when tax season rolls around.

Evidence

Keep a log of your receipts. You could still reconcile and correctly categorise but if you don’t back it up with evidence your claim won’t be valid. You have to be able to prove to HMRC you actually spent the cash for your business i.e. you didn’t just put it on your return to reduce tax owed but did not spend the money

Keep records for six years

You must, by law, keep company records for six years after the end of your company’s financial year.

 

How do I know what expenses are allowable in the context of my business?

As ever, HMRC rules can be complex and are often based on concepts such as the ‘fairness’ and ‘reasonableness’ of expenses claimed. Ultimately, the goal is for you to have a definitive list of expenses you can be confident are allowable, but “fairness” can be a vague rule to gauge your compliance by.

Here’s three ways to work out what you’re allowed to claim for

1. The gold standard is to sit down with an accountant with extensive experience in your industry. Didn’t know that was a thing? Well, look at it this way. An accountant who has only worked in a corporate setting isn’t going to definitively know what a freelance circus performer can claim for. They’ll have an idea, but they won’t know your niche or the questions to ask. There’s an accountant to suit every career path, so find yours (ours is the creative industry).

An accountant with expertise in your industry can provide you with a comprehensive list you can depend on. It will maximise your available corporate tax relief while ensuring you’re still totally compliant.

1. As a rule of thumb, you can remember the phrase “wholly and exclusively”. A term from HMRC; allowable expenses have to be “wholly and exclusively” incurred for business purposes. If you need to make a quick decision when you’re not absolutely sure, this is a good phrase to remember (although if you can call your accountant to quickly check, do that!).

 

1. We’ve written a blog with a comprehensive list of the things you can claim for. Now, every business has its unique circumstances (so there will be occasions where you might be able to claim where someone could not and vice versa) but it’s a great guide. To complement this “expense series” of ours, we’ve also written a (smaller!) list of things you definitely won’t be able to charge to your business too.

Are there any personal/professional grey areas in expenses?

When there’s a dual purpose to your expenses ie. an element of personal usage, it’s unlikely you’ll be able to include the expenses in your accounts. However, if the dual purpose is only incidental because of a business necessity, the claim may still be valid. Something like protective work clothes or a company uniform could also be used personally, for example.

Unknown expenses are like the “quick food shop”. It adds up and it can cost you.

We all run into the supermarket to grab a few things every month. Whereas once or twice is usually fine, your monthly budget might start to feel the impact if you did it every week. It’s the same when you don’t give enough attention to your business expenses. Small at first, all of those transactions can really add up. The difference is, with expenses, you don’t know how much you’re  losing out on every month.

When you start viewing them as a key player in your business finances, your cash reserves will start to reflect it. The best thing you can do is sit down with an accountant experienced in your industry to hash out the allowables. You’ll nail down all tax relief available to you, stop ineligible payments and be totally compliant. It’s win, win, win.

If you’re in the creative industry and you’re looking for an accountant who loves the type of work you do, we’re probably the folks for you. Fill out this form and we can start by having a nice little chat.

 

*You can claim for expenses made from up to seven years before you started trading. It just needs to be included in your first accounting period and tax return.