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Collecting receipts and reporting business expenses to tax authorities can feel like a burdensome obligation, but how you report your expenses is important because it can affect your bottom line. Certain business expenses incurred through the normal course of business are eligible for tax deductions, and the less money your business pays in taxes, the more you can keep as profit.
In this article, we'll discuss how reporting business expenses can save you money, the most common allowable expenses you should keep track of and how effective expense management can help you maximise your tax deductions.
As a business owner, keeping a complete record of your tax deductible expenses is crucial for maximising tax savings. By accurately reporting your allowable business expenses, you can significantly reduce your taxable profits, ultimately leading to lower income tax and national insurance contributions.
Expenses incurred for business purposes are all potentially deductible expenses that can lower your tax liability. Some examples of a business cost include:
It might seem insignificant if you don't report these expenses, but failing to claim tax relief on legitimate business costs means you might end up paying more tax than necessary, which can be detrimental to your bottom line. Therefore, reporting expenses is more than just a tiresome obligation – it's an essential task that can decrease your taxable profit (i.e. help you pay less in taxes).
Furthermore, efficient expense management also simplifies the process of filing a self-assessment tax return, saving you time and stress. Using a digital expense management system also provides a clear record of your expenses, which can make any potential audits much simpler.
Investing in a robust expense tracking system or using tools like ExpenseOnDemand can make it easier to record and organise business expenses such as business travel costs. With features like AI-powered receipt scanning and automated expense reporting, you can keep track of every business expense, receive the highest tax refund possible, and be well prepared for any audits.
One of the challenges of expense reporting is that it can be difficult to know when certain expenses are eligible for tax relief. To better understand if expenses are eligible for claiming tax relief, there are some basic principles to follow:
One of the fundamental requirements for allowable deductions is that they must be incurred wholly and exclusively for business purposes. According to the tax code, this means that expenses must be directly related to the operation and profitability of your business, and not for personal use. If you can identify a non-trade purpose of an expense, then it is not an allowable expense.
In addition, for expenses to qualify for tax deductions they must be "ordinary and necessary". Ordinary expenses are those that are common and accepted in your industry, while necessary expenses are those that are clearly needed for the operation of your business. This principle ensures that only legitimate business costs are deductible, and removes any excessive expenditures.
Maintaining accurate records is a cornerstone of effective expense management. Always retain receipts or invoices as proof of your deductible expenses. Failure to provide adequate documentation might result in you missing out on deductions during tax audits or assessments at the end of the tax year.
Tools like ExpenseOnDemand can streamline this process by scanning receipts, capturing essential information and storing receipt expense information in a digital format. This way, your accounting team has instant access to receipts and expense reports when they need them.
Adhering to these general principles can help you determine whether your expenses can be used for tax purposes, so you can be sure you’re complying with tax regulations, maximising your deductions and minimising your tax burden.
Understanding common tax-deductible business expenses is crucial for maximising tax relief. Some of the most common expenses that are tax deductible include:
Office expenses: Rent, utilities, stationery, and other general office expenses are typically tax-deductible, as these clearly meet the qualifications of "wholly and exclusively" and "ordinary and necessary".
If you operate your business from home you might be unable to claim your total household expenses, but only a portion of these household expenses (eg mortgage payments) based on the business use of your household.
Employee expenses: Salaries, bonuses, employer-paid pension contributions, and other employee benefits are considered allowable expenses. However, according to UK law, you cannot deduct national insurance contributions or dividend payments to company directors.
Travel expenses: Expenses for business trips, travel to a temporary workplace, accommodation, and work-related vehicle expenses are allowable expenses. However, ordinary commuting costs between home and a permanent workplace are not allowable employee expenses.
A travel expenses app can make it easier to report work related expenses incurred on a business trip.
Entertainment expenses: Entertainment that is necessary for the function of a business. This can include paying for meals, drinks or entertainment for staff events or meetings with business partners. Entertainment expenses must follow the specific rules set out by the tax authority in order to claim tax relief.
Advertising and marketing: Costs related to promoting your business, such as advertising campaigns, marketing research and website improvements are generally eligible for a tax refund.
Professional fees: Legal expenses, accounting fees, and other professional services directly related to your business operations are allowable expenses.
Interest on business loans: Interest paid on a business loan is tax-deductible, but not the repayment of the initial loan amount.
Depreciation and capital allowances: You can claim a capital expense for the depreciation of certain business assets, such as equipment, machinery, and vehicles, over their useful life.
Simplified expenses: A special expense category is simplified expenses, where businesses can claim a flat rate allowance for the expense instead of the actual cost. There are three types of simplified expenses: business mileage costs, working from home, and living at your business premises.
It's important to note that while most genuine business expenses are tax-deductible, there are specific rules and limitations for certain expense categories. Keeping detailed records, including receipts of each allowable expense, is crucial for substantiating your claims during tax filings for the current tax year or previous tax years.
Keeping accurate records of your tax-deductible expenses is essential for ensuring compliance and maximising your tax savings. Here are some simple best practices to help you effectively track your business expenses:
Separate business and personal expenses: Based on the principles above, decide which expenses qualify for business and which are personal expenses. To make it easier to separate the two, use separate accounts, credit cards, or wallets for business and personal expenses.
Establish clear guidelines in your business so your employees know what qualifies as a tax deductible expense and what qualifies as a personal expense.
Setting up an expense approval workflow can be essential in separating business and personal expenses. With expense approval software, you can create an approval workflow that lets key decision makers approve expenses as valid business expenses.
Record expenses immediately: One of the keys to accurate expense reporting is recording expenses immediately. The more time that passes the more likely employees will forget to report their business expenses. Encourage employees to record expenses immediately.
Keeping paper receipts means that receipts may be lost or damaged, or employees may forget they have them. A receipt scanning app makes it easy to report expenses immediately, as employees can scan their receipts on the go and submit them to accounting immediately.
Categorise expenses: Organise your expenses into relevant categories, such as travel, office supplies, professional fees, etc. This streamlines the process of identifying allowable expenses during tax season. With ExpenseOnDemand's receipt scanning app, employees can scan a receipt and categorise the expense immediately.
Utilise expense management tools: Businesses that still rely on paper receipt management for expense reporting are missing out on significant time and cost savings that come with using expense management software.
ExpenseOnDemand offers a comprehensive solution for receipt management and expense tracking. With its AI-powered receipt scanning feature, you can easily digitise and store receipts by simply taking a photo with your smartphone. The software uses OCR technology to automatically extract relevant information, such as the date, amount, and merchant, and can categorise expenses automatically.
With ExpenseOnDemand you can also generate detailed reports that clearly show your tax-deductible expenses. This saves your accounting team a lot of time and effort, but also makes sure you have a well-organised and easily accessible expense record that makes it easy to claim expenses and even view expenses for previous tax years.
Following the general principles of tax deductible expenses can help you understand whether an expense is tax-deductible. Once you determine that an expense has a business element, it's still essential to properly categorise the expense so that your accounting team can properly claim tax relief.
Traditional expense reporting (where employees collect paper receipts and manually process expense reports) is slow and prone to error. But with software like ExpenseOnDemand, managing tax deductible expenses is fast, simple and accurate.
With ExpenseOnDemand, employees can take a picture of their receipt when out of the office, making sure they never lose a receipt. The receipt scanning app uses OCR technology to extract all essential information. Employees can then submit their digital receipts and expense reports through a multi-layered approval hierarchy, to ensure no expense is wrongly approved as a business expense.
Book a demo with ExpenseOnDemand today to make claiming tax relief easy.
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