Calculate your non-taxable business expenses
If you provide an employee with anything other than pay, it
probably counts as an expense or benefit. Some of these are
taxable, others are non-taxable. Non-taxable expenses, otherwise
known as allowable expenses, help you reduce your tax bill. You
deduct them from your end of year gross profit when you fill out
your end of year tax return, leaving you with a smaller amount of
taxable profit to pay tax on - which, of course, means you pay less
tax.
However, the expenses system is notoriously difficult to
navigate, and few business owners are able to get it right without
professional help. Getting an accountant to go through your
business expenses is well worth the money - if they're any good,
they'll save you money as well as making sure you're sticking to
the rules.
But you can use this guide to get an overview of how business
expenses work and what's allowable and what's not.
What counts as a non-taxable expense?
As a general rule of thumb, non-taxable expenses are anything
you or your employees buy that's needed for the running of the
business, and used exclusively for the business. Broadly speaking,
business expenses are allowable, and personal ones are not.
So that includes:
- Professional charges: accountancy, legal, etc (but
not the costs of forming a company or obtaining a lease)
- General running costs and sundries: cleaning,
postage, phone bills (as long as they're not for personal use),
stationery, equipment hire or rental (but not purchase, which is
covered instead by capital allowances)
- Travel and subsistence: that is exclusively for
business purposes - taxes relating to travel and in particular
business vehicles can get pretty complicated though, so speak to a
tax advisor, HMRC or an accountant to make sure you get everything
right. Travel to and from work is not allowable
- Employee costs and payroll before any deductions
are made
- Premises costs: rent, business rates, bills for
electricity, water and gas, repairs (but not buying premises -
buying property is covered by capital allowances)
- Advertising, promotion and marketing costs
- Benefits in kind for employees: health plans, gym
use, pension plans, dental care and so on
- Although at the end of the tax year you need to pay Class 1A
NICs on the value of any benefit in kind provided to employees
earning more than £8,500 annually and company directors, including
yourself if you are a director - talk to HMRC for more info/
- Materials and supplies used to produce goods or
deliver services
- Finance costs: including bank charges, interest
and bad debts that are unlikely to be repaid
This list is only an outline. You need to check specifics with
HMRC for anything you're unsure on, and for other areas not
mentioned here that you're not sure about. You can find more
detailed information on non-taxable expenses in this guide from HMRC on
non-taxable expenses.
What doesn't count
Expenses that you can't deduct from your end of year tax bill
include:
- Any personal expenses: including travel to work
that's normal commuting and other non-business travel, clothes,
living expenses and fines such as parking tickets.
- Entertainment: including food or drink bought for
clients.
- Personal drawings: including
- Costs which are recoverable under insurance.
- Check with HMRC if you're unsure.
- Buying equipment or premises is not an allowable
expense - but those purchases may well be covered by the
capital allowance system.
- Depreciation of assets is not an allowable expense
- but you can also cover these with the capital allowance
system.
- Company cars are a particularly sticky area. You
definitely need to get either professional advice or talk in depth
to HMRC about what you can and cannot claim when it comes to
vehicles.
You can't deduct any non-taxable expenses from your profit on
your tax return.
Keeping records of your non-taxable expenses
Throughout the tax year, keep records of:
- Every expense and benefit in kind, what is was for, how much it
was and the date it was made.
- Most businesses ask employees to submit a spreadsheet of this
information monthly.
- You also need to keep all receipts for every expense of benefit
in kind.
You report expenses to HMRC either by filling out P11Ds at the
end of the tax year, or by getting a dispensation. You then record
the total amount of non-taxable business expenses on your end of
year tax return.
Getting a dispensation:
- This is by far the easier option. It heavily reduces your
paperwork as once you've got it, you don't need to record expenses
using P11Ds (see below) at the end of the year, and you don't need
to worry about paying tax or NICs on benefits and expenses.
- The dispensation lasts indefinitely once you've got it
(although HMRC may review it from periodically), so it's just a
one-off bit of admin.
- To qualify for a dispensation, you need to have a system in
place whereby no individual can authorise their own expenses - but
other people in the company can authorise each others'
expenses.
- Find out more about dispensations from HMRC.
- Or go straight to the
dispensation application form (P11DX).
Using P11Ds:
- If you choose to use P11Ds at the end of each tax year rather
than getting a dispensation, you need to complete a P11D (Expenses
and benefits) form every tax year for each employee earning more
than £8,500.
- The P11D details all non-taxable expenses claimed in the tax
year, including all benefits in kind (the cost of healthcare and
dental plans, pension plans, gym memberships and so one), and any
NICs and tax you owe on expenses and benefits. You need to record
the date and details (what it was for) of each expense and
benefit.
- Use
HMRC's A to Z of expenses and benefits to find out the best way
of recording expenses and benefits (and here's a
guide on using the A to Z, if you need a hand navigating
it).
- If an employee earns less than £8,500, you use a P9D
instead.
- If you are a director in a limited company, you need to fill
out a P11D for yourself.
- If you are self-employed you don't fill out a P11D for
yourself. You just include the amount of allowable business
expenses you personally have incurred in the total allowable
business expenses figure on your tax return. (In other words, you
don't need to spell out your own individual expenses, you just lump
them together with the rest of the company's.)
- You need to make clear on the P11D or P9D whether tax has
already been paid on any items already through payroll.
- If you don't have any expenses, you still need to submit a
P11D, showing that no expenses are due. It's unlikely that HMRC
would chase you up on this, but it is possible, and if you don't,
they could technically fine you.
Key deadlines for P11Ds:
- P11Ds (and P9Ds) need to be returned to HMRC by July 6.
- Any tax or NICs due on expenses and benefits need to be paid by
July 19 (or July 22 if you pay electronically).
FAQ
I work from
home. How do I go about claiming non-taxable
expenses?
This is a bit of a tricky area, but you can most likely claim for
parts of your bills and costs. Talk to HMRC about what exactly you
can claim for as it's a case-by-case thing, or get professional
help.
What about expenses that are part for business, part
personal, such as mobile phones?
You can normally claim for the percentage of the expense that
relates to business use. Again, you need to talk to HMRC or get
professional advice on how to do this. On your tax return, you need
to record the whole expense, then separately record the amount that
relates to non-business use. You also need to record what's what
(personal or business) on the actual bills and invoices.
Resources
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