Trying to claim for everything, mixing up your tax years and assuming you don’t need receipts to claim expenses are some of the most common tax deduction misconceptions. For self-employed business expenses, here are some more misunderstandings you should know about.
- I Can Claim for Everything
- I’ve Mixed up My Tax Years - but It’s No Big Deal
- I Don’t Need Receipts to Claim Expenses
- Claiming an Expense Will Reduce My Tax Bill by That Amount
- I’ll Be in Trouble With HMRC If I Don’t Categorise My Expenses
It might be tempting to claim expenses for those supermarket meal deals you enjoy during lunch, but HMRC has taken a hard line on things like food and mileage in recent years.
A lot of self-employed people do get confused about whether they can claim for these costs. The fact is, we all need to eat and drink so you can’t claim these examples purely as business expenses. Just be careful to make sure that you can prove your expenses are necessary.
For example, you could show your expense logs to prove your mileage for an important business trip. There are also many apps available that can help track your business mileage.
Although, there are some key points to give you a better idea of what you can and can’t claim. For example, if you take a guest out for a business-related meal, you can only claim tax back for your food - not theirs.
Or, you can still claim if you’re going on a business trip outside of your regular working hours and the destination is more than 10 miles away from your location. Just be honest and realistic. Record everything you spend but then take a step back and decide if you should claim an expense.
Providing the wrong documents such as receipts and invoices for an accounting period is one of the most common mistakes made by self-employed people.
If the documents are wrong or have mistakes in them, then you might be open to some penalties from HMRC. Not because of the errors, but if you’ve claimed too much. The way HMRC decides this is if the mistake you made was careless, deliberate or deliberate and concealed.
So the higher the percentage (with the highest being 50%-100%), the more tax you’ll have to pay because of the errors.
We understand that knowing the tax year for which you’re obtaining information. can be quite confusing. This is more common if your accounting period isn’t the same as the standard April to April tax year.
Don’t make the mistake of feeling like you should pull together all of the information for the year just passed. This is an incorrect approach. If your accounting period is April to April, then in January 2020, you’ll report on your business activity for April 2018 to April 2019.
Instead, try to get in the habit of recording your income and expenses as you go along and make sure they’re dated. If you do this monthly, it makes it so much easier to identify the correct tax year. So you’ll save plenty of wasted hours.
Just like a retail store won’t accept a return if you can’t find a receipt, it’s somewhat similar when you claim expenses.
You’re likely to be concerned about claiming for expenses without a receipt. It’s understandable as the worry comes from whether HMRC will begin an investigation and if you can’t prove the payment was allowable, then you’re in trouble.
That’s not necessarily true.
You don’t need receipts for every claim that you’ll make. If you lose or misplace one, that’s still okay. You can even claim for the expense as long as you can provide suitable evidence to back it up.
So if you have information like the date, time and place the transaction was made, your claim should be successful if HMRC deems it reasonable it will be acceptable. To be on the safe side, it’s a good idea to store or photograph all your receipts or use an app to photograph them.
You won’t have to worry about losing them and they’ll be in a secure place for when it’s time to claim for your expenses.
These records are also vital should you become VAT registered in the future. Without having clear copies of receipts, you’ll find it hard to identify qualifying items that can be included on your first VAT return (where you can recover VAT on allowable expenditure prior to registering).
This misconception stems from the fact that a lot of people don’t know what tax-deductible means. Let’s say you claim an expense of £100, if you think that this reduces your tax bill by £100 then that’s incorrect as that’s not how expenses work.
As a self-employed person, you can deduct the cost from your income on your tax return. So if you spend £100 on an allowable expense for your business, it doesn’t mean your taxes will be reduced by £100.
It’s a really easy mistake to make. In this example, it’ll only reduce your taxable income by £100. So if your tax rate is 20%, then you’ll save £20 on your taxes by making that purchase. Remember, while claiming expenses will reduce your tax bill, they’ll come off your bottom line.
Another big worry that self-employed people have is that HMRC will kick up a fuss if you haven’t sorted your receipt categories. They have more significant tax crimes to deal with, so don’t worry too much.
While it’s a good idea, you don’t need to provide a detailed breakdown of your expenses if your turnover is less than £83,000. All you need to provide is the total amount.
Despite that, it’ll still be useful for you to know all of the categories of expenses on which you’re spending your money. If you want to see a higher level of accuracy, then you should look into this. This is hugely beneficial if you’re trying to work out the final costs of any jobs you’ve completed, for example, as it can help you quote for future jobs.
One way to make this easier is to either use an app which you can categorise receipts into or use an expense template so you can categorise as you go along.
There’s still a lot to do with logging expenses and claiming them being one small part. You still need to stay on top of your profit and loss, maintain your petty cash log, make sure your customer invoices are accurate and so much more.
To help with all of that, we’ve created a bunch of useful small business bookkeeping templates, designed to make your life much easier.
Start Logging and Categorising Your Expenses Easily With Your Expense Template
If you want a more natural way to log expenses, keep track of them and make it simpler to find when claiming for costs, then make sure you download our free expense template.
It’s one of the many templates we’ve put together in a useful pack which will help you better manage and grow your business. To get your free copy, click on the link below.