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Start ups: Claiming expenses

It's worth taking advice before you start work to ensure you set up and maintain your accounting records, including expense receipts, in the right way. Set up costs can also be tax deductible under certain circumstances. The experts from the UK200Group explain more:

Receipts

One of the benefits of being a limited company owner is that expenses can be claimed back from your business and can reduce your tax bill. This may appear counter-productive, as every expense claimed reduces your company profit margin, but a reduced profit means a lower Corporation Tax bill at the end of the year, saving you money.

If these are legitimate business expenses that you would have incurred anyway, it makes perfect sense to claim them out of pre- taxed money through your limited company.

How do you claim expenses?

Expenses incurred wholly and exclusively for the purposes of the business can be claimed in a number of different ways:

  • Direct payments from your company bank account: This is the most common method of recording your expenses as they are paid for directly out of company funds and are easily identifiable by your accountant.
  • Company Credit Card: This method again allows for easy identification and recording of company expenses. It is important to retain your credit card statements and all related purchase/expense invoices so that your accountant can identify what the expenditure is related to.
  • Petty cash: Often directors will draw cash from the company bank account and use this cash to pay for company expenses. This is most commonly used for travel and subsistence costs, particularly when travelling abroad. This is a totally acceptable method of incurring business costs provided that receipts are retained in support of the expenditure.
  • Expenses borne personally by the director: It is also possible for a director to incur expenses on the company's behalf. These can be reclaimed from the company at full value provided evidence exists that the expenditure was genuinely incurred, usually by way of a periodic expense claim.

Regardless of how it is incurred, each expense should be supported by an invoice or receipt and needs recording. Most accountancy services include an expense recording and payment process, and many online providers now offer solutions whereby expenses records are automatically updated as soon as you upload an image of a receipt from your phone.

If you don't already have a recording and payment process in place, you needn't worry. You can easily record your expenses in an excel spreadsheet, and only basic information is required:

  • The date of the expense
  • What the expense was for
  • The amount of the expense

If you record expenses manually, be sure to hold on to all original receipts, or photos/ scans, as your accountant may need to verify any unusual costs. Similarly, if you wish to claim VAT on an expense, you need to provide a VAT receipt.

Your own cash expenses can be claimed at any point throughout the year, but it is good practice to claim regularly and keep tabs on VAT expenditure. Credit card use and company capital expenses can be claimed at any time, although you'll find that most contractors claim these expenses on a quarterly basis to align with their VAT returns.

In this section the UK200Group are assuming you are not caught by the additional tax liabilities arising from IR35 and working through your own limited company.

There are a number of costs that you can generally claim as allowable expenses, including:

  • Financial costs, including accounting fees and insurance
  • Certain advertising or marketing costs
  • Business purchases, such as laptops and stationery
  • Mobile phone (contract must be in the company's name)
  • Travel, subsistence and accommodation for travelling to a temporary workplace
  • Protective clothing for work

Don't forget the golden rule

To qualify as a legitimate expense without causing tax problems, tax rules dictate, that the cost needs to have been incurred wholly, exclusively and necessarily in doing your job for your limited company.

Practically speaking that means the additional cost of being a freelancer.

The tax rules regarding expenses can be complicated and it's important to take advice, however, the good news is that your UK200Group accountant can help you claim legitimate expenses without falling into the many traps that exist.

Am I eligible for tax relief on travel and subsistence expenses?

One of the most common expenses for freelancers is travel and subsistence. You claim these from your limited company so long as your costs are incurred in travelling to a temporary workplace.

Broadly, a temporary workplace is a location where you are there for a limited duration and have not and expect not to be there for more than 24 months.

This extract was taken from the practical guide to 'Running a Limited Company'. It was reproduced with permission from UK200Group and written by experts in the UK200 Freelancers & Contractors Group. Find out more about the UK200Group here: https://www.uk200group.co.uk/

Click here to download your copy of 'Running a Limited Company'.

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