Seofon’s Chris Cooper provides three simple rules to avoid HMRC penalties over expenses.
If HMRC suspects foul play, make no mistake, they will crack down. I’ve been party to HMRC inspections where they have questioned every single expense, also asking to be shown the item physically on site. Sadly, I’ve also seen organisations receive 5-figure penalties that have ended their business.
This is a thought that can send shivers down the spine of well-meaning businesses that are unfamiliar with the system. While it can take a bit of getting used to, once you understand the basics, expenses aren’t as complex as all that. There are three simple rules to follow to avoid any nasty surprises from HMRC:
Be reasonable. Be justifiable. Be sure you can prove it.
Applying these rules to every expense should keep you on the straight and narrow. But there are some nuances it’s helpful to understand. Here are a few examples…
I can expense my laptop, right?
One of the most common ways to trip up is by assuming that as an item is used for business, it can be a business expense. The key is proportion. How much of the time is it used for business as opposed to personal use?
If you buy a laptop, for example, it has to be used predominantly for business purposes. The odd Google shop at lunchtime is fine, but if you’re spending all of the time on your laptop gaming, it’s not a legitimate business expense.
I can expense lunches though, can’t I?
If you’re travelling for work, yes! If you’re sat at your desk, no. Subsistence should only normally be claimed when you’re out on business, away from your usual place of work, as you have to live and eat. It’s your choice as to what you buy – if you choose to dine at the Ritz, that’s up to you – but think: If you’re sitting in front of a tax inspector, who wants you to justify that as a business expense, can you do that?
But I can still entertain ‘on the business’, surely?
If it’s genuinely for business, you can claim some entertainment expenses. But the same thinking applies – you have to be able to convincingly justify the expense. The days of flashing the business card when you’re out with friends and saying ‘it’s on the business’ are over. You can still pay on a business card, but HMRC won’t see a night out on the town as a legitimate business expense and it won’t be eligible for tax breaks. It would have to go through your accounts as Owner Drawings.
What about car travel?
A private car can be used for business, and expenses can be claimed, however they have to be proportionate to how much it’s used for work versus private use, and this can get complex. The simplest way to claim private car travel expenses is to claim for mileage. The rates for mileage are determined by HMRC and incorporate costs such as fuel and tax and are quite generous.
If you have a car that the company is paying for, this is seen as a benefit in kind and there are additional tax implications that apply. The company can claim for the costs as an expense, but you will be liable to pay taxes if the car is used at all for private use. You can find out more on the Gov.uk website.
It’s worth noting that you can’t claim for travel to and from work, only travel that is for work at a place other than your usual workplace. Mileage in this instance is calculated from your place of work, unless your starting point is closer to the destination.
I work from home. What expenses can I claim?
If you use your home, a home office or separate building on your property for work, you can claim expenses. There is quite a detailed assessment on the HMRC website of what you can claim based on the square footage of your room, your bills, the percentage of time that you’re in there and the percentage of time you are working. There is also a flat rate you can claim, which is simpler for most people. This flat rate is designed to cover all of your expenses for running your home office, except broadband.
A lot of companies have a separate broadband for their office, which is an allowed expense. But many don’t, and it’s difficult to determine a proportion of broadband that’s used for work versus for home use such as Smart TVs. So in this case, broadband can’t be claimed for.
How can I prove an expense is genuine?
There are three best practices for documenting genuine expenses:
- Use your diary
- Keep receipts
- Use a digital bookkeeping tool and add notes to entries
The easiest way to document the ‘soft expenses’ is to keep your diary up to date. If you do this, you can always refer back to say that you “were meeting X on date Y and that’s when you had a business lunch at Z” – that’s documented proof that can be shared with an inspector.
Keeping on top of expenses as you go is really important to ensure things don’t slip through. Using an app connected to accounting and bookkeeping software, is the easiest and quickest way to keep track. With Xero, for example, you can take pictures of your receipts and upload them straightaway into the system. Add notes of who you were meeting and why and you’ll be able to quickly justify any legitimate expense.
If you’re unsure of an expense, a bookkeeper will be able to answer any questions you may have. If you don’t yet have a bookkeeper, get in touch and Seofon will be happy to help, with a free initial consultation.