Business owners almost always incur costs during the course of their work. Although most business expenditure is allowable, which means it is eligible to claim back, some is not. Whilst claiming expenses incorrectly could end in significant fines, failing to claim allowable expenses can hamper business profitability.

Are business owners aware of what qualifies as a business expense?

In our survey of 1,247 small business owners, more than eight in ten (81%) admitted to not fully understanding what qualifies as a legitimate business expense. The majority (55%) of business owners will search online to ensure their claims are valid, and 13.5% will consult their bookkeeper or accountant for a professional opinion.

This leaves more than one in every ten (12%) business owners clueless as to what they can expense, with 2% saying they are hesitant to expense anything through their business for fear of being caught out by HMRC and hit with hefty fines.

How much are unclaimed expenses costing businesses?

Two-thirds of business owners (65%) say that, at some point, they have failed to file business expenditure, with some of these failing to claim more than £10,000 in allowable expenses.

When all small businesses in the UK are considered, these figures suggest that £5.6 billion is being missed in unclaimed business expenses because of an epidemic of hesitancy among SME owners concerning expenses.
 

What is stopping SME owners from claiming their legitimate expenses?

More than two fifths (43%) of small business owners say they failed to claim business expenses due to lost receipts and invoices. A further 36% were simply unsure whether it would pass HMRC’s stringent rules, and 8% didn’t claim as they were worried about penalties.

Worryingly, 41% could not be bothered or didn’t have time to claim expenses, meaning many are missing tax relief that could be beneficial to their businesses.

Expense claims which seem insignificant can amount to a considerable sum of money when added together, having a serious effect on a business’s profitability and overall financial health.

Expenses least likely to be claimed by SME owners

Of the small business owners surveyed, 41% are hesitant to expense food and drink, with HMRC’s rules about what qualifies as subsistence being somewhat a grey area though the cost must arise out of necessity and be reasonable from a business perspective.

A further 43% are unlikely to claim tax relief on work clothing and uniform, even though businesses can claim relief on personal protective equipment like high-vis jackets and safety boots.

A third (33%) fail to claim vehicle expenses including insurance, road tax, and fuel, despite HMRC also permitting claims of 45p per mile for the first 10,000 business miles in a year when using your own car.

The rules for claiming vehicle expenses are slightly different for sole traders and limited companies, so it’s possible that confusion around this could be the reason some people fail to claim.
 

Strange expenses can be legitimate too

When asked about the most unusual expenses they had claimed for, many respondents cited entertaining clients, giving staff gifts, and COVID tests as their most out of the ordinary expenses, with some expenditure very out of the ordinary, including:

• An adult-sized pink tutu
• Taking a customer to a strip club
• Two live lobsters
• Materials to decorate a car as a space rocket
• Mass purchase of sex toys from China
• A Venus flytrap plant
• Visiting a tantric workshop
• A fart machine
• Visiting Victoria Falls National Park, Zimbabwe
• A full Lederhosen outfit
• Cremation costs

Although some of these expenses might get a giggle at HMRC, as long as they are reasonable and genuine expenses as a direct result of business, they are legitimate.

How to get maximum benefit from expenses while avoiding fines

Guidance from HMRC can sometimes be difficult to interpret or apply to your own business, so consulting a finance professional can help demystify the situation, as well as ensuring your business is in the best financial health possible.

Accountants are familiar with all manner of expense claims, and will help you make sure you’re filing those which you’re entitled to claim for.

We also have a variety of resources available on our blog, with a guide and video explaining what you can claim for, as well as resources to help you with claiming for using your home as an office, which has become much more common in the past year.

All SME owners will benefit from using systems which help them record important financial and tax documents, and from taking the time to claim allowable expenses on their tax returns.

Learn more about our online accounting services for businesses. Call 020 3355 4047 to chat to the team, and get an instant online quote.