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 it 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).
- 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.
- 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 number 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).
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-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.
For more information on accounts for your small business, check out our guide to early-stage accounting.
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