Majid Rasheed on how much you can get back from HMRC
TAX can be a minefield and ensuring the that correct income is declared is vital. However, the matter of expenses is open to interpretation and misunderstanding.
On the one hand you don’t want to miss out on valuable reliefs, yet on the other, you’ll not want to mistakenly claim for something not allowable and possibly give HMRC an excuse to conduct an investigation into your affairs.
Your accounts: The accounts you draw up are a summary of income and expenses, generally for a period of 12 months and are declared to HMRC on your tax return. Expenses are only allowable costs to a business incurred ‘wholly and exclusively’ for the purpose of trade.
As a result, these expenses can be deducted from your total income, allowing you to claim tax relief on them. If you trade via a limited company then by definition these expenses are to be ‘wholly, exclusively and necessarily’ for the purpose of trade.
However, not all expenses are allowed relief against your income.
Your allowable expenses are the same as those whilst you are employed, as well as equipment; replacement of parts; professional indemnity insurance; professional subscriptions; course fees (in some cases); accountancy fees; advertising and marketing; printing; stationary and books; postage; use of home as office; mileage and business travel; subsistence; staff wages; and cleaning and laundry.
There are also partial allowable expenses which you can claim, at an appropriate percentage or reduced amount, in certain circumstances to account for private use. These relate to motor running costs; telephone; hire purchase (leasing) interest; and other loan interest.
Not all business related expenses can be claimed against your income, so it’s worth asking your accountant, ensuring you advise them of all of your expenses and let them guide you on tax deductions permitted.
How to record the expenses: An important part of the tax process is the need to keep full and proper records of all business income and expenditure. This simply means retaining all receipts and invoices relating to business expenses as HMRC has the power to enquire into your affairs and may ask for evidence to support your claim.
By law you have to keep your records for a minimum of six years. Penalties may be charged for failure to maintain or retain records.
Not everyone uses full-blown accounting software so at the minimum, consider an Excel spread sheet, with references to relevant documentation, to keep track of your expenses; your accountant should be able to provide you with a template.
The better the record keeping, the easier it is to draw up accounts, and if using an accountant, the lower the bill for his service.
The advice is that, where relevant, you retain income received summaries; bank statements, cheque book stubs, paying-in-books; bank loan statements; HP/ leasing agreements; expense invoices/receipts; and records of business and private mileage.
You must note the sources of all monies into your various accounts including non-business related income. Your records need not be sophisticated but you should keep a record of all transactions as they arise.
Income is taxed in the period in which it is earned, even though this is not necessarily the period in which the income is received. In contrast, expenses are recorded on earnings basis and are deducted in the period they relate to which may not be in the period they are paid.
Since April 6, 2013, self-employed individuals can generally opt to be taxed on cash basis where they are taxed on total income received, less expenses paid, within the relevant period.
There is little distinction between capital costs (fixed assets) and revenue costs (recurring costs) here. Therefore capital costs paid in a given period, on which capital allowances would normally be claimable, are treated as normal business expenses, having been adjusted for private usage.
But to qualify for cash basis of taxation, certain conditions must be satisfied. The most important condition is that all receipts recorded for the period must be below the VAT registration threshold.
If the total of receipts exceeds twice the amount of the VAT registration threshold at the time the year after, the business must leave the cash basis system of taxation.
It’s worth noting that businesses have the option to utilise cash basis taxation for their future tax years where there has been a change of circumstances. Your accountant should advise you before joining the scheme – cash basis taxation is not the best option for everyone.
Majid Rasheed is a client manager at RA Accountants LLP
This article has been reproduced from the Contract Flooring Journal. You can find them at www.contractflooringjournal.co.uk.