The business results are based on cash receipts less business payments.
You do not have to include stock, work in progress or bad debts.
Adjustment are required where you change from one basis to the other.
There are some restrictions on what expenses can be claimed.
There are special rules for claiming capital expenses.
These maximums are the total of your combined business’ receipts calculated on a cash basis.
Losses cannot be carried backwards or sideways.
Loan interest paid for any reason can be claimed, up to £500 pa.
If your accounts are simple and you have a personal mortgage or other non-business loan it may be worth opting for cash basis to claim the loan interest deduction which will not otherwise be due.
This is the basis most accountants will use to prepare your business accounts.
The business results are based on invoice dates less bill dates.
Adjustments are required for stock, work in progress or bad debts.
Adjustment are required where you change from one basis to the other.
Losses can be carried forwards, backwards or sideways.
Loan interest paid must relate wholly or partly for business purposes. You can claim that proportion relating to the business.
The following seasonal gifts as “trivial” benefits and HMRC do not seek to tax them as employment income or benefits:
• A turkey (but not a hamper).
• A box of chocolates.
• A bottle of ordinary wine or two (not a case)
From 6 April 2016 there is a statutory exemption for trivial benefits with a cost not exceeding £50.
• Trivial benefits – HMRC
• Employment Income Manual – HMRC
Entertaining whether staff or customers is not usually allowable for tax purposes. By concession however you are allowed £150 per person (£300 for an employee and their partner) per annum for staff events.
If you provide your employees with gifts at an annual party, the cost of the gifts could be added to the cost of the function by HMRC. Make sure you give out the gifts separately from event, as the cost of the gifts could take you over the £150 per head limit. Treat trivial gifts as “staff welfare” in the accounts, the expense is fully tax deductible.
Input VAT is reclaimable by the employer on the cost of trivial benefits made to staff. If input VAT is reclaimed by a one-man owner-manager or for the cost of an event open only to the directors (so other staff are excluded), HMRC will disallow a VAT recovery on the grounds that the motive behind incurring the cost was a personal one. It is difficult to try and disprove that this is not actually the case.
The cost of entertaining yourself, clients, customers or third parties for business purposes is specifically disallowed.
These are taxable as an employee’s earnings. If you wish to avoid the employee having an additional tax/NI liability the employer can pay this using a “settlement agreement”.
Input tax is recoverable on entertaining overseas customers and your own staff but not on entertaining customers in the UK.
There are two ways of claiming for motor expenses if you are below the VAT threshold, one based on business mileage and the second on actual expenses. Mileage is usually more tax efficient and is much simpler to track. If you wish to compare the claims details on how to calculate the deduction using both methods are below. In addition, you can also claim for business parking, congestion charges, tolls and the interest on loans used to purchase the vehicle. Motoring fines for parking, speeding etc are not allowable.
To calculate the deduction you apply the business percentage by the interest paid. We recommend preparing a full reconciliation and for this you will need:
• The date the loan was taken out.
• The amount borrowed
• The charges for arranging the loan.
• The payment schedule (ie first payment £250 then 34 monthly payments of £200 with a final payment of £150).
• The business use percentage.
Most of this information will be on the loan agreement documentation.
You can claim 45p for the first 10,000 business miles and 25p thereafter together with an extra 5p per mile for each extra business passenger per trip. The detailed instructions on this can be found here.
You must keep a detailed log of business mileage for each business trip in support of the claim. A spreadsheet for this can be downloaded by click this download – Mileage and a video explaining how it works is here.
For employees claiming mileage the employer can also reclaim the VAT on petrol and maintenance but you will have to retain receipts in support of this.
To make a claim for actual costs you add up all your outgoings for:
• road tax
You then apply the business percentage to the total.
Capital costs. – The claim for the actual cost of the vehicle (known as capital allowances) is now based on the list price and the level of carbon emission. You should be able to get this information from the manufacturer’s website. The Revenue’s directions on how to claim can be found here. For vans you can usually claim 100% in the first year.
For tax purposes there are two types of contract. Firstly, where the business owns or will own the car by the end of the contract or where your business rents/leases the car without ever owning it.
A tax deduction for 85% of the rental payments can be claimed. If the car has CO2 emissions of 130g/km CO2 or less, you can claim the full cost of the charges. The tax relief for leasing or buying is much the same in the long run. Consider your cash flow circumstances and choose the deal that best suits you.
Expenses must be incurred wholly and exclusively for the purposes of the business. You can claim for vehicle expenses, train, bus car and air fares, the cost of hotels and other overnight accommodation and the cost of meals. You cannot claim for non-business driving or travel costs, fines (such as parking fines) or for travel between home and work. Be careful of expenses which could be said to be duel purpose.
Business travel and related subsistence and accommodation expenses are usually allowable for tax purposes. Consider the type of journey, the trades and where the business is run. Where a journey is both business and private then claim the business element only. Travel from home can be claimed where you are based from home. HMRC may resist a claim if there is another operational base or bases (site, hospital, office, shop, yard, sales area etc).
For subcontractors, HMRC may insist that the operational base is the site where work is undertaken. Ensure contracts/paperwork are undertaken made from home and tools are stored there. In the case of Notion v Young (1971) 47 TC 60, a bricklayer worked on a number of sites within a certain radius of his home for a few weeks at a time. It was held that his home was the base of his operations.
This can be claimed with business travel where the destination is outside the normal pattern. The claim must be reasonable and supported by receipts. HMRC will seek to disallow expenses where there is no evidence that the expense has been incurred.
In Prior v Saunders  66 TC 210, the subsistence costs of a subcontractor whose work was carried out for several years in an area of the country away from ‘his home base’ were disallowed as there was a regular work pattern.
Where you undertake most of your company work from your home there are three methods of reclaiming expenses.
You can either simply claim the HMRC’s approved Homeworking allowance of £6 per week. Easy to calculate and claim but you may be able to claim more using the other methods.
You can make a claim based on actual costs. The business proportion of costs which can be included are:
Light and heat.
Home telephone calls.
Insurance, where business equipment insured under that policy.
Repairs of business equipment.
Cleaning costs of your workspace.
As an employee you cannot reclaim the costs of:
Expenses that do not have receipts i.e., cash wages of a cleaner.
Detailed records and receipts are required however not all of household expenses can be claimed.
Creating a licence agreement with your company to allow it to occupy part of your property. It then pays you rent and you then claim all your expenses under Self-Assessment Return.
You may claim a proportion of your home expenses although there is a higher rate restriction on mortgage interest. Check with your mortgage provider or landlord whether you can create this type of licence. Again, detailed records are required and you must also complete the land and property section of your tax return. Let me know if you want a draft licence agreement.
If you provide your own business equipment you may claim capital allowances on your costs.
An employer can supply an employee with one mobile phone if the phone remains the employer’s property. The contract must therefore be in the employer’s name. In these circumstance the employer can claim all of the costs while a taxable benefit in kind will not arise on the employee.
As there is a ‘use of asset’ tax benefit charge if an employer lends you an asset that is used privately, it is advised that the employer sets strict written usage restrictions. This may not be possible for items of furniture, which are likely to be used privately unless the home office is closed off from the main home.
Your company may be able to reclaim VAT on certain building works it does to your property, but as any claim will be blocked if you benefit in your personal capacity, it may be unwise to do so.
For sole traders and partnerships charitable subscriptions or donations are not allowable as a deduction for tax purpose unless, exceptional, they are incurred wholly and exclusively for the purpose of the trade (charitable sponsorship).