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Nothing is quite so misunderstood as business expenses. Writing something off as an expense has a nice ring to it, but the reality of what that means still takes people by surprise.

Two of the most common misconceptions about business expenses are:

How business expenses work

Some people think that claiming business expenses means that you get the money back to you. This might be true for employees, but if you work for yourself, it can be a dangerous way of thinking.

The truth is, you won’t receive any money back from the government. Instead, your business expenses are offset against the money you earn through the business.

This is because businesses only pay tax on their profits – the money that’s left over when the bills are paid.

Income – expenses = profit

 
In other words, deduct your expenses from any money you earn in order for you to calculate your actual profit figures. This means that when HMRC calculates your tax bill, they will be going off profits, rather than your total income.

Expenses in action

If you charge someone £100 for a service, but you spend £10 in order to deliver that service, then you only made £90 profit. Therefore, you should only pay tax on £90 and not the full £100.

So if you’re subject to the basic tax rate, you would save 20% tax on £10, which would be a saving of £2. Applying this to all your expenses can add up to some hefty savings which really reduce your tax bill.

 
Tax return services

What can you actually claim for?

Every year without fail, accountants and HMRC see bizarre expense claims from businesses who think they can write anything off.

All your business expenses must be – you guessed it – expenses of the business. In other words, they must be things bought directly for the purpose of conducting business.

Of course, if you can prove that any of these things are necessary to the business, then that’s fair enough. If you’ll struggle to convince HMRC, then it’s probably not a real expense.

If you are unsure about what you can and can’t claim for, you wouldn’t be the first. Things like fuel costs can be a bit tricky because it depends on how you’re using the fuel.

You can take a look at the government’s website for a list of things you might be able to claim for, or watch our introductory video.

 

 

The consequences of getting it wrong

Falsely claiming for expenses is tax fraud and evasion. This is something that HMRC does not take lightly. You could be fined or even get a criminal record in some cases. It’s not worth the risk!

As with anything finance or tax-related, if you’re unsure, it’s best seeking the advice of an experienced accountant.

Do you have any questions about business expenses or would like to speak with a professional? Give us a call on 020 3355 4047 or grab an instant quote from us.

About The Author

Kara Copple

An experienced business and finance writer, sometimes moonlighting as a fiction writer and blogger.

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