Business expenses can be confusing – in fact, more than eight in 10 (81%) business owners admit to not fully understanding what qualifies as a legitimate business expense. Although most business expenditure is allowable, which means eligible to claim back, some is not, and getting it wrong can result in significant fines. However, failing to claim allowable expenses may also seriously hamper business profitability.
Research conducted by into SME owners’ understanding of business expenses revealed that, at some point, two thirds (65%) have failed to claim expenses, with some of these failing to claim more than £10,000 in allowable expenses. This expense hesitancy epidemic suggests that as much as £5.6 billion is being missed in unclaimed expenses across the UK. Claiming expenses brings tax breaks, improving start-ups’ bottom lines, so here are five tips for small business owners as they navigate expense claims.
Expense as you go
When tax return season comes around, it is a nightmare to try and remember everything you have spent money on for the business throughout the year. To avoid this, and to break up what may seem like a big task into more manageable chunks, start-ups should track their expenses continually.
Keeping track and logging expenses as you go along will mean payments don’t get missed, allowing start-ups to reap maximum benefit and tax relief, and improve their bottom lines.
Keep a digital record of receipts and paperwork
As you keep a continuous record of expenses, it is also a good idea to keep a digital log of your receipts, invoices and paperwork. This will create a much more organised filing system and prevent pieces of paper from going missing before you file expenses. Lost receipts and invoices account for 43% of unfiled expenses.
Shockingly, research by The Accountancy Partnership revealed that one in 10 entrepreneurs keep essential documents in a shoebox or drawer, but with modern bookkeeping software, this is unnecessary and counterproductive. Lots of software now uses optical character recognition technology so business owners can use their phone cameras to capture details of a receipt and automatically file it to their business finance system, which saves time and reduces the risk of receipts going missing.
Don’t be put off claiming just because the expense is strange
Over a third (36%) of SME owners don’t claim expenses because they are unsure what qualifies, but the general rule is if the expense is reasonable and rises directly as a result of running a business, it is legitimate.
Some start-ups may be concerned that unusual expenses will bring fines from HMRC, but that isn’t always the case. In a survey of entrepreneurs, legitimate expenses including live lobsters, fart machines and a tantric workshop were revealed. These may have got a giggle from the taxman, but they were genuinely allowable expenses.
Remember you can claim for using your home as an office
If a start-up is run from its founder’s home, the owner can claim tax relief on these costs. In this case, SME owners can either claim using flat rates set by HMRC if the home is used as an office for a minimum of 25 hours a month, or expenses can be worked out using the proportion of the home that is used for business.
This will support start-up owners with the running costs of their home and therefore business, which will help to boost profitability.
Consult a professional for extra help
Guidance from HMRC can sometimes be difficult to interpret or apply to your own business, so consulting a finance professional will help to demystify the situation. It will also help to keep start-ups in the best financial health possible. Accountants are familiar with all manner of expense claims and will help to ensure all allowable expenditure is being claimed against.
