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What mobile phone expenses can I claim?

Mobile phone expenses are an area where personal and business often overlap to cause some potential tax pitfalls.

No one wants to be without their mobile, but few people want the hassle of carrying a separate business phone. So it’s usually one mobile phone doing it all, business and personal. How do you separate out what mobile expenses can be claimed through your business?

As ever, there are differences depending on whether you’re self employed or employed (including company directors).

Self-employment

The rules here are relatively simple. You can include your mobile phone costs as a business expense, but you can’t claim for any non-business use.

There’s no set method to work out your non-business use. But whatever you use has to have a logical basis and be appropriate for your business. You need to be able to justify your figures if they’re checked by HMRC. Keep your mobile phone statements / records and calculations to back up whatever method you use.

One method would be to look at a few months’ worth of phone statements and work out business use percentage. Then use this percentage to apply to the rest of the year.  You should re-check the percentage on a regular basis, at least once per year, ideally every few months.

It may be easier to have a separate mobile or SIM that’s only used for business purposes. This would allow you to claim all of the costs.

If you buy your phone handset separately then you can claim some or all of that cost. Personal use would have to be taken into account here too. You could potentially use the same personal use percentage for the calls and apply it to the handset.

Remember, if you’re VAT registered you can only claim VAT on the business use element of any mobile costs.

Employment

This covers company directors as well as employees of all types of business.

As with other employment related expenses, we’re thinking about what mobile expenses the business can provide without being a classed as a benefit in kind. Benefits in kind incur additional personal tax which may be paid via payroll or through your personal tax return.

For mobile phone expenses it makes a big difference whether the contract is in the business name or your personal name. There are different reporting requirements, and more importantly some significant tax differences and tax traps for the unwary.

Employer provides the mobile and pays bills

The business can provide each employee with one mobile phone or SIM card without any benefits in kind being incurred. The phone contract must be with the business (not the employee) and the business must pay the bill directly.

The most important thing, which is unusual, is that private use of the phone is allowed. This makes it a very good option for company directors and employees with a mixture of work and personal use. Particularly where they don’t want two separate handsets or SIM cards.

Additionally, if the business is VAT registered, it can claim VAT on all of these cost as long as there is some reasonable element of business use.

If there is more than one mobile (or SIM) provided, then the second one would be a benefit in kind unless it any personal use was not significant.

Employee pays the bills

If the mobile contract is in your own name and you are reimbursed for the mobile phone expenses, you do have to worry about business use versus personal use. The business can only reimburse the actual cost of business calls. Anything beyond this will result in a benefit in kind.

What is the actual cost of business calls?

It can be tricky to work out the business calls element. HMRC advise that you should “approach the matter in a reasonable way and give an appropriate deduction that reflects the actual cost to the employee of business calls”.

This “actual cost to the employee of business calls” is important. It means, if making the business calls doesn’t cause you to pay any more each month, there’s nothing you can claim. For example, if you’re on a tariff with unlimited minutes.

This is different to the sole trader who can split the whole bill based on percentage of business use and personal use. For an employee it’s only the extra cost of business calls that can be claimed and not any element of the line rental.

You need to be able to provide some sort of evidence to back up what you claim. This applies whether that’s based on actual calls or increase in costs. You don’t necessarily need to count every call, every month, but you do need to be able to justify your logic or calculation.

What about if the cost of the mobile phone?

If your employer pays for the mobile phone itself,  the fixed monthly charges or any element of personal use, then there will be a benefit in kind. That’s the case whether they reimburse you for the costs or pay the bill directly. There will be some income tax and Class 1 National Insurance to pay. This may be via payroll or through your self-assessment tax return.

Paying for the mobile phone handset or the fixed monthly charges incurs a benefit because the phone is available for personal use as well as business use.

HMRC’s guidance doesn’t mention anything specific about data costs. It’s only the business phone calls that are listed as being exempt from benefits in kind.

So what expenses should I include?

This is an area where you do need to proceed with caution and review regularly. As many mobile contracts now include very high or unlimited minutes, you could end up without any additional costs related to your business calls. Anything you reimburse in this situation would therefore include an element of personal use and could be a taxable benefit.

VAT can only be claimed on the business calls, not on anything else that may be paid for or reimbursed.

Summary

If you’re self-employed, it’s pretty straightforward. You just need to focus on the best way to work out your percentage of business use.

If you’re employed then the rules are surprisingly lenient if the business provides the phone, but very strict if the contract is in your own name.

If you’re claiming for your personal mobile expenses through your limited company, you need to be very careful to make sure you’re not accidentally incurring a taxable benefit in kind.

Working from home when you’re self employed

If you’re self-employed and working from home, you could claim some use of home expenses for this.

This might include business support activities such as marketing and social media, quotes and invoicing or admin as well as your actual day to day self-employed work.

There are two main ways that you can include expenses for working from home: actual cost and simplified expenses.

Before we go any further, this information only applies to sole traders or partnerships. If you’re a company employee or company director, check out this post for more information as you have different guidance.

Actual cost working from home expenses

The first method is to use your actual home office costs and claim a portion for your business use.

These costs would typically include:

Generally water costs aren’t included unless you have a metered supply and the trade that you’re carrying out from home uses a lot of water.  Otherwise water costs wouldn’t be significant.

You can’t claim the full cost of these expenses, only the portion that relates to your business use. So you need to work out the business percentage and personal percentage.

How do I work out the business portion?

There’s not one specific way to work out business use. HMRC will accept any reasonable way of working out your business costs as long as it’s logical and can be justified in relation to your situation.

The most popular way is to combine the portion of the house and the amount of time spend working there.

For example:

If you have 4 rooms in the home and use one as an office, that would be ¼ or 25%. So if your annual bill was £400, you would divide it by 4, giving £100 in relation to the business. If you know floor area, you could use this rather than number of rooms.

If you work at home full time, that would be 5 days per week or 5/7th of the time. You would apply this to the £100. This means that the total you could claim from your annual £400 bill would be £71.43.

If you only work from home one day per week then that would be 1/7th of the time. Here you could only claim £14.29 from your annual £400 bill.

This method works well for costs that relate directly to the property, such as heat and light, mortgage interest, rent and council tax.

For other costs such as home broadband and telephone, you may need to use a different percentage. This could be based on checking your call statement or any other logical estimate of the business use that you could justify to HMRC.

Here are some different examples from HMRC.

If you’re using the actual cost method then you should keep records in relation to the expenses that you claim.

If this all seems like far too much work, then you can use simplified expenses as an alternative for your home office costs.

Simplified working from home expenses

HMRC have a simplified expense scheme for use of home that lets you use a monthly flat rate instead of working out a portion of actual costs.

You can use this if you work more than 25 hours at home each month. There is a flat monthly rate ranging from £10 per month to £26 per month, based on how many hours of business use at home per month.

Depending on the hours worked you can claim between £120 and £312 per year. This may work out better or at least similar to the actual cost method, particularly if your work-use area is small in relation to your home.

You don’t need to keep records for use of home expenses claimed under the simplified scheme, apart from tracking how many hours you are working from home.

The simplified scheme doesn’t include business use on your home broadband or phone. You can still claim this in addition to the flat rate. However, you’ll need to do this using the business portion of the actual cost. There’s no flat rate scheme for these costs.

Which to use?

If you’re organised and have all your expense records, then you could use the actual cost method. This would also work well if you use a large portion of your home for your business or spend a significant amount of time there.

If you want ease, don’t have all the costs handy or don’t use a large portion of your home for work, then the simplified costs method may work better for you.

And remember, this only applies to sole traders and partnerships. It doesn’t apply to employees or company directors.

What clothing expenses can I include?

“Clothes make the man. Naked people have little or no influence on society.”

Mark Twain

I think most people would agree that clothes are pretty important. Clothing is a basic necessity of life, as HMRC describe it, “for warmth and decency”. This necessity is also why very few clothing expenses are allowable.

Business expenses have to be wholly and exclusively for business. It’s very hard to prove your clothes are wholly for business, when going without them wouldn’t be a practical option.

What clothing expenses can be included?

There are a few types of clothes that HMRC do recognise as potential business expenses. The three areas that are allowable are

Uniforms

HMRC defines a uniform as something that identifies the wearer as belonging to a particular profession. A person on the street should be able to recognise that someone is wearing a uniform rather than everyday clothes.

Think fancy dress for the most obvious examples. Police, nurse or firefighter uniforms are all favourites for fancy dress as they’re clearly identifiable. A waiter’s dinner jacket or evening dress would also be seen as a uniform for their profession. Similarly with a chef’s checked trousers and white hat.

The other aspect that can make something a uniform is if it carries branding or a logo for the business. If you get your company logo embroidered on a standard polo shirt, it can become an item of uniform as it clearly identifies you as working for that business.

Your clothing needs to have a permanent and conspicuous badge (or logo) if it’s going to be considered as a uniform. A removeable badge doesn’t count and you can’t claim for other – non branded items of clothing. Employees or staff all wearing similar design or colour clothes, is not enough to make that a uniform.

Protective Clothing

One type of protective clothing is something that goes over the top of your everyday clothes. This might include aprons, overall, lab coats etc. These are worn in addition to your everyday clothes and are protecting them.

If the main purpose of the protective clothing is to protect you from the elements, such as a coat, then it’s not allowed. It’s considered as something that you’d need to wear anyway.

Other types of protective clothing you can include are items that are necessary for safety or general protection. For example, heavy duty gloves, hardhats, steel toe-cap boots, hi-vis vest. You could also include trousers with reinforced knees if they were bought from a specialist workwear retailer. These type of items are designed as workwear and aren’t suitable for everyday wear.

Costumes

The final category relates primarily to actors and entertainers. Clothing that you buy specifically to wear in a performance is considered as part of a costume and is allowed. This could apply to items that would normally be considered as everyday wear.

Repair and Upkeep

You can also include expenses that relate to the repair and upkeep of your uniform or protective equipment, where necessary. Upkeep can also include cleaning or a contribution towards laundry costs.

Repair or cleaning costs for your everyday clothes aren’t allowed, even if they were damaged through work or only worn for work.

Employees and Directors

Company directors, you need to make sure any clothing you are claiming as business expenses meets one of these criteria otherwise there could be some personal tax liability.

Any clothing that your employer provides or pays for, which doesn’t fall into one of these categories, could potentially be considered as a benefit in kind.

What clothing expenses are not allowed?

If the clothing doesn’t fall under one of those categories then it’s not allowable.

Everyday clothing is not allowed if you could wear it outside of your work environment. It is the COULD that’s important, regardless of whether you DO actually wear it outside work.

If you buy a suit to wear at work in order to look professional and conform to the general image of your workplace, it’s not allowable.

If you have clothes that you only wear at work, they are not allowable unless they are branded and become a uniform. This would apply across many professions where clothes might get dirty, or where a particular type of clothing is required e.g. gym wear.

Summary

If clothes aren’t uniform , protective or a costume and you could wear them outside of your work (even if you don’t) then they’re not allowable.

However you can turn everyday clothes into a uniform by adding a conspicuous badge or branding to the item.

New Year’s change to VAT penalties

With Christmas on the way, I’m sure you’re firmly on Santa’s nice list and never submit any late VAT returns. For those unlucky businesses on HMRC’s VAT naughty list, the new year brings some important changes to the VAT penalties scheme.

How do VAT penalties work currently?

The current VAT penalties scheme is based on surcharges. A late return or late payment is classed as a default. They are both penalised in the same way.

 For a business with less than 150k turnover, one default triggers a warning letter. Two defaults starts the clock on a surcharge period. Every subsequent default within the next 12 months results in a penalty based on the amount of VAT due. For example, the 6th default within a 12 month period results in a surcharge of 15% of the VAT due or £30 (whichever is more).

Businesses with turnover over £150k go straight into the surcharge period on the first default.

If no return has been submitted, HMRC will estimate the VAT due in order to work out the surcharge.

The business needs a clear 12 month period with no defaults in order to reset the clock and leave the surcharge period.

There is no surcharge for a late return if you’ve paid the VAT on time, have a repayment due or there is no VAT to pay.

When are the VAT penalties changing?

The new penalties will apply for VAT periods starting 1 Jan 2023. So if your 31 March 23 return is late, it will be the first one with penalties under the new scheme. 31 Jan 23 and 28 Feb 23 returns will still have penalties based on old scheme.

The new scheme splits up the penalties for late submission and late payment and deals with them in different ways.

All VAT returns will be affected, including nil or repayment VAT returns where no VAT is due.

There are no changes in relation to the penalties for inaccurate returns. They will remain the same.

Late submission penalties

Returns that are submitted late will accrue penalty points. Each late return results in one point.

There are penalty point thresholds which vary depending on whether you submit  your VAT returns monthly, quarterly or annually.

If you cross the penalty points threshold there is an initial fine of £200. Any further late submissions result in further fines of £200 for each late return.

The submission penalties apply even if it’s a nil return or a repayment return. This is different to the old scheme where you could submit a late return without penalty, providing there was no VAT due.

How do I get rid of my submission penalty points

Submitting all your return on time for the relevant compliance period will reset your points to zero. For example, if you submit quarterly you need 12 months (so 4 returns), all within the submission deadline to clear your slate with HMRC.

Late payment penalties

If you’re unable to pay your VAT on time then HMRC is giving you 15 days from the submission and payment deadline to either pay the VAT due or arrange a payment plan with them.

If you’ve not paid the VAT or agreed a payment plan by day 16 then there is an initial late payment penalty. This is calculated as 2% of the VAT due at day 15.

If it’s still overdue at day 31 then there is a further penalty added of 2% of the VAT due at day 30.

After that there is an additional penalty (on top of the previous ones). This is 4% per year for the period that the balance is outstanding, calculated on a daily rate. The total is determined once you pay the VAT.

Late Payment interest

In addition to the late payment penalties, HMRC will also charge interest on the overdue balance. This will be charged at the Bank of England base rate plus 2.5%, from the day that your VAT is overdue.

So although the late payment penalties don’t apply until day 16, there will still be interest to pay from day 1.

There will still be interest applied, even if you make a payment arrangement to avoid the late payment penalties.

Soft landing period

The good news is that HMRC are giving businesses chance to get used to the changes. There will be no first late payment penalty charged until December 2023 providing you pay within 30 days of the payment due date. If you pay later than 30 days there will still be penalties charged.

There is no soft landing planned for the late submission penalties.

Summary

The main businesses that could be caught out by these changes are those that submit nil returns or get VAT repayments. You may have got into the habit of not worrying so much about being on time as previously there was no surcharge penalty if there was no VAT due. Under they new scheme there will be penalties and  no soft landing period for this part of the changes.

So your new year’s resolution is to make sure that those VAT returns are submitted on time. Remember if you can’t afford the VAT, you can make a payment arrangement with HMRC to avoid late payment penalties.

What can I claim for travel and subsistence?

You’re at work, you buy some food, it must be a travel and subsistence expense. Simple, surely? Think again!

Travel and subsistence expenses are one of the areas of business travel that causes the most confusion. So, what are your options for claiming these expenses and how do you get it right?

What is travel and subsistence?

Put simply, travel and subsistence expenses are the costs for your journey, your accommodation and your food and drink during a business trip. Motor travel expenses have already been discussed in a separate post. This blog will focus on the other types of travel costs, and in particular, the subsistence side of things – meals, food and drink.

What can’t be claimed as travel and subsistence?

Being at work is not enough for a meal to be counted as a subsistence expense because, as HMRC argues, “everyone must eat to live”.

As with other types of travel expenses, we are looking at what is allowable as a business expense for sole traders or what can be reimbursed without being a benefit in kind for employees and company directors.

Generally, food and drink are allowable expenses on journeys that are away from the base of work and outside the usual pattern of work travel (for sole traders) or to a temporary workplace (for employees). So, that daily coffee you buy on the way to work, would sadly not count as a subsistence expense. But the latte at the train station on the way to a client meeting in another town, may be allowed.

Establishing whether a journey can be counted as a business trip, is always the first step because the other travel expenses follow from there. No business journey, no travel expenses. Business journeys are a complicated area and there is a whole blog post covering this topic.

But just because a meal is part of a business trip, doesn’t always mean that it’s subsistence. If you pay for other people, such as customers or suppliers the meal would be classed as entertaining rather than subsistence. Again, this is another complex area which has implications for corporation tax, income tax or VAT.

Alcohol on its own would be classed as entertaining, although limited alcoholic drinks can still be included as subsistence when drunk as part of a meal.

What can I claim for travel and subsistence?

Actual costs

You can claim any actual costs incurred. These costs need to be evidenced e.g. with receipts, bills or other proof.

This applies to sole traders putting expenses through their business, to employees claiming travel expenses from their employer or directors claiming travel expenses from their limited company.

HMRC doesn’t care whether you travel first class or if you dine in MacDonalds; any reasonable expenses are allowed. The only limits HMRC sets are if the expense is lavish enough to be considered as some kind of employee reward rather than purely a travel expense, or if it doesn’t meet the criteria as a wholly business expense.

If you’re an employee making a journey that meets the criteria as business travel, but you aren’t reimbursed for the full cost by your employer, then you can claim the balance. This can be done directly to HMRC or via a self assessment tax return.

Benchmark or scale rates for employees

Employees (and company directors) have an alternative option for claiming some travel expenses. Instead of using the actual cost, you can claim meals at HMRC’s benchmark rate. These rates unfortunately don’t apply for sole traders or partnerships.

The rules around these benchmark rates changed from April 2016. Previously there were amounts set for specific meals. Now the rules are based on minimum journey time rather than meals.

The benchmark rates are the maximum that can be paid to an employee without incurring tax or NIC on the payment and without using the actual costs. Employers can pay less than these rates if they wish.

However, this doesn’t mean that you can just chuck all of those travel receipts in the bin. The employer has to have a checking system in place to make sure benchmark payments are being claimed legitimately. This could still mean hanging onto some receipts as evidence.

The detail

You can only claim one allowance per journey. If you had a 12 hour journey you could only claim £10, not £5 and £10.

A meal can only be reimbursed once. For example, if a hotel bill included an evening meal, you couldn’t claim the £25 allowance as well. But you could claim the £10 allowance for the other meals during that day.

There are no benchmark rates for overnight accommodation or for staying with friends and family. For these expenses, you use the actual cost.

There is however, £5 per night that can be paid for overnight stay incidentals (such as phone calls and newspapers).

Instead of using the standard rates, a business can also agree its own bespoke benchmark rates with HMRC. They can also apply to use an approved industry scale rate, if one exists.

Remember – these benchmark rates apply only to employees, not to sole traders or partners.

Key points

Start by establishing whether it’s a business journey. If the journey is not allowed, then the expenses won’t be allowed either.

Think about whether it might be classed as entertaining rather than travel and subsistence.

Sole traders and partners can only use actual cost.

Employees and company directors can use benchmark scale rates as an alternative method for meal costs.

What counts as business travel?

When it comes to claiming business travel expenses, it really is all about the journey.

Once a trip is classed as a business journey, all the other travel expenses such as subsistence or motor costs can follow from there.

But this isn’t always straightforward.  Whether something counts as a business journey depends on your particular circumstances and how you operate.

There are also some differences between sole traders / partnerships and limited companies. But before we get into the differences, let’s look at the key rules that are the same for all businesses.

Commuting costs are not allowed

The first important rule is that travel between home and work (your normal commute) is not allowed.

There are some differences as to how the workplace is defined, but the common factor remains that journeys between home and work are not classed as business travel. Therefore no associated expenses can be claimed.

No dual purposes expenses

The other important thing to remember is that for business expenses, the trade purpose must be the only purpose. This applies to all types of business.  

So if there is a dual purpose to a journey (business and private), then the whole journey and all associated expenses could be disallowed. As ever are some exceptions and complexities, but as general advice it’s much better to avoid making dual purpose journeys if you can.

What are the differences?

There are different sets of legislation and rules between sole traders / partnerships and limited companies which are similar, but not exactly the same.

The main reason for the difference is that directors of limited companies are considered employees of the company, so what they can claim for travel is covered by the rules around employee expenses along with any other employees.

A sole trader (or partner) is not an employee, so what they can claim is covered by a different set of rules. If the business has employees then the employees will be covered by the employee expense rules, but the sole traders or partners themselves won’t as they are not employees.

The main differences relate to how the workplace is defined.

Sole traders & partnerships

The workplace for sole traders or partnerships is defined by the base of operations.

The workplace doesn’t have to be a building, office or shop that you own or rent. It can be anywhere that you regularly carry out your trade. So for a personal trainer, this could be the local gym.

What is my base of operations?

Base of operations really depends on how you run your specific business. You need to think about your particular circumstances. Some areas to consider are:

Once you’ve established your base of operations then you should not claim any expenses for journeys made between home and that location. These journeys are classed as your normal commute.

This seems simple enough if you operate from a shop or an office, but what about other businesses that operate from home or don’t have a specific workplace?

I don’t work from a specific location

Some traders are “itinerant”, meaning they don’t operate from a specific location. For example, a builder who travels to wherever the job is located and operates the business from their home. Admin such as bookkeeping and invoicing is done at home, tools are kept at home and the home address is used for the business correspondence. In this case the base of operations will be home and travel from home to the various jobs can be counted as a business journey.

Working from home sometimes doesn’t automatically make it your base of operations. If you sometimes or partly work elsewhere then this could well be counted as your base of operations rather than home. Particularly if it’s a regular location and / or the trips are predictable. This could include a location where equipment is stored or if you visit a depot to pick up items before starting work.  The more regular and predictable the journey between home to a work location, the more likely it could be considered as part of your commute rather than business travel.

The base of operations doesn’t have to be a single building, in some circumstances it could be a larger geographical area, your general area of trade. If you live some distance from your area of trade, it gets more complicated.  In this case, the journey from home to the area of trade could be counted as your commute. As the commute is not allowed, this part of the travel would be disallowed as a business journey.

Working out the base of operations can be tricky for certain businesses. If you aren’t sure, then this is something you can discuss with your accountant.

Employees (including directors of ltd companies)

For a limited company, the director and other employees fall under the rules covering employee expenses. These rules look at which expenses can be reimbursed without being classed as a benefit in kind.

For an employee, the travel has to be necessary as part of the duties of their job. This could be because it is directly as part of the job itself or because they have to visit somewhere in the course of their job.

This is broadly the same as expenses having to be wholly business related for sole traders and partnerships. But the focus and detail is slightly different; you have to consider the person and the job role rather than the general business.

There is no concept of base of operations for employees, instead we look at whether it’s a permanent or temporary workplace.

What is my permanent workplace?

A permanent workplace is a place at that you attend regularly for the performance of the duties of the employment

The employment contract usually states the permanent workplace and this is normally a good indication. However for tax purposes, it’s the pattern of work that dictates the permanent workplace and sometimes it may not agree entirely with the contract.

Here are some other common indicators of a permanent workplace, although these will vary depending on the specific job:

Travel to your permanent workplace is your normal commute, so you can’t claim expenses associated with that journey.

Are there any specific rules?

HMRC have some specific measurements to determine whether exactly how much time must be spent for somewhere to be classed as permanent rather than temporary.

Types of permanent workplace

As with the sole trader / partnership, a workplace doesn’t necessarily have to be an office, factory or shop.

Your permanent workplace can be home.

It’s possible to have more than one permanent workplace. If you travel between two or more permanent workplaces, the trips between can count as a business journey. You can claim the expenses for this. What you can’t claim is the journey to and from home at either end.

A depot or similar base can be a permanent workplace even if you don’t spent that much time there (Depot and Bases rule). It can be classed as permanent if it’s the base from which you work regularly or are routinely allocated tasks.

The permanent workplace doesn’t have to be a specific building, it can be a larger area. If the duties of employment are defined by a specific geographic area then that whole area is the permanent workplace (the Area rule). If you live outside the boundary of your work area, then the journey to and from the boundary is your normal commute. Journeys inside the boundary are business travel and allowable.

What is a temporary workplace?

A temporary workplace is somewhere that you attend in the course of your job that doesn’t qualify as a permanent workplace. The two key aspects are:

You can only claim for necessary attendance. If you chose to work at a temporary workplace because it’s preferable or easier, then no expenses can be claimed.

Travel to a temporary workplace in the course of your business duties is classed as a business journey. You can therefore claim any expenses associated with that journey.

What about similar journeys?

However, if you’re going to a temporary workplace that has a similar journey to your permanent workplace, then you can’t claim those expenses. For example, offices in the same travelcard zone in London, buildings located close to each other, journeys in the same direction and similar length.

How about if you have to drive by or close to your permanent workplace on the way to a temporary workplace? Do you lose the commute part of the journey? If you don’t stop then you are fine and the whole journey can be claimed. However, if you do stop at your workplace and perform some duties, then you have to split the trip into two parts, the normal commute part and the permanent to temporary workplace part.

At what point does a temporary workplace become permanent?

A temporary workplace can become permanent even if you haven’t been there for more than 24 months.

In the 24 month rule, it is the “expect to” part that becomes important. It doesn’t matter if your role at a particularly location is in month 1 or month 24. As soon you expect to be there for more than 24 months for more than 40% of the time, it becomes a permanent location.

So if you’re 6 months into a 12 month placement and it gets extended for another 2 years, then it immediately becomes your permanent workplace. It doesn’t matter that you’ve only been there 6 months, it’s how long you expect to be there that counts.

The reason this is important is because, as soon as it becomes your permanent workplace, the home to work trip is no longer a business journey and you can’t claim for any associated expenses. It has become your normal commute.

Summary

In many ways the rules around business travel are similar across all business structures as the overall intention is the same. However the workplace definition for employees is more rigidly defined and complex than for sole traders. So if you’re moving from one business structure to another, this is something to watch out for.

The first step is to work out your base of operations or permanent workplace (depending on your type of business). This gives you the basis for whether you’re making a business journey or just carrying out your normal commute.

If you’ve firmly established that you’re making a business journey then you can claim the associated expenses such as motor costs, meal or accommodation costs. These type of expenses are broad topics in their own right and will be covered in the future.

If you’re in doubt about your base of operation, your permanent workplace or whether something counts as business travel, then this is something you can discuss with your accountant. If you would like to chat to us then just email to tax@cooperfaure.co.uk.

Navigating business motor expenses

Business motor expenses can be complicated and with rising fuel costs you want to make sure you’re making the right choice for your business. So, let’s take a trip through your options.

How you put your motor expenses through your business can depend on whether you’re a sole trader or limited company, if you have employees, whether you’re VAT registered, the type of vehicle and the nature of your journeys.

Whatever method you choose, you always have to start with the journey. You can only claim motor expenses for business travel; not for personal travel or commuting.

There are two main routes to claiming motor expenses, mileage or full cost.

Mileage method for motor expenses

This method uses a fixed rate per business mile so relies on keeping accurate mileage records.

Good For

Can Claim

Can’t Claim

The mileage rate is supposed to cover not just fuel, but all the costs involved with running a vehicle. It’s also supposed to account for an element of wear and tear that would reduce the value of the vehicle. If you’re using mileage, then no other motor costs can be included as business expenses for that vehicle.

With this method, you can claim journeys in different vehicles, for example if you have two family cars. The most important thing is that it’s a business journey.

For employees and directors of limited companies, any personal mileage reimbursed by the company is classed as a benefit in kind and is taxable. Similarly, if the mileage is reimbursed at more than HMRC’s approved rate, the difference becomes a benefit in kind.

What about company cars?

How about if an employee is using a vehicle owned by the business but paying for the fuel personally? They still need to track their business mileage so that they can be reimbursed for their fuel costs.

They can claim the business mileage at the HMRC advisory fuel rate, which covers the fuel costs only (and not any of the other motor costs covered in the approved mileage rates).

Conversely, if the business pays for the fuel and the employee doesn’t want to end up with a benefit in kind, they can reimburse the company for their personal mileage, again at the HMRC advisory fuel rate.

Full cost method for motor expenses

This uses the actual costs of fuel and running the vehicle based on the expense bills and receipts.

Good For

Can Claim

Can’t Claim

If the vehicle is owned by the business, then it’s more common to use the full cost method. However, if there is any element of personal use this has to be taken into account.

For sole traders this would mean discounting a portion of the motor costs in relation to the personal use. The most accurate way to work this out is to log business mileage so that you can see what portion of the overall mileage relates to business. This can then be applied to the motor costs. Or if it’s mainly business use, then log personal mileage.

For limited companies this would mean looking at Benefits in Kind for the employees who are using the vehicle. Any personal use whatsoever in a vehicle owned by a limited company can potentially cause a benefit in kind. There are particularly strict rules around company cars, but company vans can incur benefits in kind as well.

Does being VAT registered make a difference?

There are some extra considerations for motor expenses if your business is VAT registered.

If you’re using the mileage method, then you have an additional calculation to do for VAT. Also, don’t throw away those fuel receipts!

VAT can only be claimed on the fuel element of the mileage allowance. HMRC provides an advisory fuel rate to apply to your mileage allowance; this depends on your particular vehicle and is updated quarterly.

You also need to ensure that you have VAT receipts covering enough fuel for the amount of VAT that you are claiming on the fuel element of your mileage.

Whatever method you are using, you also have to make sure VAT is not being claimed on any element of personal use.

This is easy enough if you’re using mileage, as only business miles are being claimed. It’s a bit harder if you’re using the actual cost and there are two options.

HMRC have scale charges – these are fixed rates, based on the CO2 emissions, that show how much should be deducted from the VAT.  The amounts are given for a month, quarter or year depending on the VAT period.

Alternatively, if you have accurate mileage records, you can work out the actual percentage of personal use mileage and then deduct that element, with the associated VAT from your fuel costs.

There are also some VAT differences in what can be claimed for the cost of the vehicle depending on whether it is a car or a van and whether it is new or second hand. For example, you can’t normally claim VAT on the purchase of a car. This will be covered in more detail in a future post.

Can I change from one scheme to another?

You can switch from mileage method to full costs and vice versa, but only when you change your vehicle. Once you’ve decided on a scheme for a particular vehicle, you should stick with it until you replace the vehicle.

Changing times for motor expenses

Despite the rising price of fuel, the mileage rate remains at 45p per mile. The advisory fuel rate is adjusted quarterly in line with fuel prices, but the approved mileage rate has remained at 45p since 2011. This means that as fuel prices go up, you’re effectively being compensated at a lower rate for the other motor cost elements.

It is definitely something to consider if you’re replacing your vehicle or bringing a new vehicle into the business.

If you have a new or low maintenance vehicle with good fuel consumption, this may not be an issue. However, if you have a vehicle with a high portion of business use (or wholly business use), that’s expensive to run in terms of fuel and other motor costs, then using the actual costs may be better value.

Summary

The method you choose will largely depend on whether you’re using your own vehicle and the proportion of business miles and personal use.

If you have any element of personal use then logging business mileage is important, even if you are using the full cost method, so that you can make sure all your expenses are business-only.

If you’re thinking about a new or replacement vehicle then it’s always good to discuss the possibilities with your accountant, particularly if you’re VAT registered. Every business is different, and you need to find the best option for your particular circumstances. If you’d like to chat to us about this, then just send an email to tax@cooperfaure.co.uk.

Lunch is on me! What can I claim for entertaining?

Don’t worry I’ll put it on expenses! A familiar comment on TV as the high-flying entrepreneur treats their friend to lunch in an expensive restaurant. What you don’t see, is what happens to that receipt later when it gets to their accountant. Many clients are disappointed to discover that the tax rules for entertaining are much less generous in real life. 

What is entertaining?

Business entertainment is the provision of free or subsidised hospitality or entertainment. The person being entertained may be a customer, a potential customer or any other person.

Entertaining can involve eating, drinking, accommodation and other hospitality. It could include tickets for sporting or cultural events, entry to clubs or nightclubs, use of an asset such as a yacht. Entertaining includes subsidised events as well as free events. It can also involve gifts (such as Christmas presents to customers).

The upside of entertaining

It’s fine to have expenses for business entertaining and include them in your accounts. Entertaining is a legitimate and important part of many types of business. It needs to be recognized as business expense in terms of the business profit.

The downside of entertaining

Apart from a few exceptions, there is no tax benefit to be gained from entertaining. Most entertaining expenses are disallowed for VAT, corporation tax and income tax.

Similarly expenses related to the entertaining event are also disallowed.  For example travel, meals and accommodation costs to attend an entertaining event.

However if providing hospitality and entertainment is your business trade (or part of your trade) e.g. hotel, restaurant, events company etc. then this is different and expenses are allowable.

Sometimes an element of entertaining is expected as a normal part of a service e.g. a tea or coffee at the hairdresser. That is fine as long as it’s not excessive. It’s assumed to be factored in as part of the cost of the service that’s being provided.

How is entertaining different from travel and subsistence?

Both entertaining and travel & subsistence costs often involve eating, drinking and accommodation but travel is allowable for tax whereas entertaining is not. So how do you tell them apart?

The main difference is that entertaining involves paying for people who are not business employees such as customers, suppliers or new prospects. 

Staff can claim travel and subsistence costs for a trip away from their normal place of work that is necessary for business. This expense is allowable for VAT and for income tax and corporation tax. But if you pay for a non-employee, even if it’s related to business, that cost becomes entertaining.

A hotel stay and overnight meal for an employee on the way to a customer meeting is travel and subsistence. Meeting the customer and paying for lunch is entertaining.

The other thing to think about is whether the costs are directly related to the trade of the business. Meals and accommodation costs for non-employees can sometimes be allowed if they are directly involved in the trade of the business and the cost is not excessive. For example a construction company could pay for the travel expenses for its subcontractors as well as its employees to work on a non-local building project.

So is any entertaining allowed for tax?

There are a few specific situations when entertaining can be included as an expense for tax and these relate to entertaining of business staff and also gifts. 

Entertaining Staff

Staff entertaining is all allowable as an expense for tax providing it is wholly and exclusively for the purposes of the trade and is not incidental to entertaining being provided for customers. This is the case for income tax, corporation tax and VAT too.

This means that the main purpose of the expense has to be entertaining the business staff. Business staff means payroll staff and does not include subcontractors and volunteers.  If an entertaining expense meets these criteria it’s allowable for tax.

However, businesses need to be careful as too much generosity to their staff can actually be a disadvantage. There’s a limit to how much entertaining staff members receive before it becomes a benefit in kind and is personally taxable for them.

There are also some VAT complications to be wary of.

What entertaining can I provide to my staff without it becoming a benefit in kind?

Businesses can provide an annual party for payroll staff as long as it’s available to all employees (whether as one event or various events across sites) and does not cost more than £150 per head, including VAT.

There can be more than one function e.g. a Christmas party and a summer BBQ,  providing the total costs don’t exceed the £150 limit across the year.

This limit includes VAT and covers all costs such as travel to the event and accommodation that may be provided. If staff members bring invited guests, such as family members, then they fall under the £150 limit of the relevant staff member. If the conditions are not met or the £150 limit is exceeded then staff will end up with a taxable benefit for the entertaining event.

Sadly if it’s only directors on the payroll and no other staff, then the exemption doesn’t apply.

Sole traders are not considered employees, so although they can claim for staff, their own costs would not be covered.

Another spanner in the works is that VAT can only be claimed on the employee costs. So if your employees bring guests, although the guest may be covered under the £150 per head limit, you can’t claim the VAT on their costs. This might mean dividing up costs in terms of number of employees and non-employees for your VAT return.

Overseas customers

One very odd anomaly is that VAT can be claimed on entertaining overseas customers, as long as it’s a “reasonable” cost. However for corporation tax or income tax purposes the expense would still be disallowed.

What about mixed events?

Unfortunately not everything in life is neatly clear cut. Some events may be a mixture of business and entertaining. Other events might be entertaining but for a mixture of staff and clients. How should the business deal with these?

For mixed events it’s important to work out what is the main purposes of the event and what is incidental. Is it a work event with some incidental entertaining or a entertaining event with some incidental work?

What’s the occasion?

If it’s primarily a work occasion and entertaining expenses are incidental and very minor, they can usually be included. A basic lunch provided at an office meeting to enable the meeting to carry on without interruption would be OK. Lunch with customers in a restaurant, particularly if alcohol was involved, would not.  If entertaining expenses at a work event are significant or substantial, they should be separated out and disallowed.

Similarly, if it’s primarily an entertaining event with a minor work element, the direct work related expenses can be separated and included. This would not include expenses related to employees attending, it would be expenses like an advertising display stand, business leaflets etc.

Who is attending?

If it’s an occasion with both employees and guests attending, then you can think about whether the business would still have paid for the event without the guests being there e.g. just for employees. If the event would not have been paid for without the guests then it should be considered to be business entertaining rather than staff entertaining and all expenses (guests and staff) would not be allowable.

This is a very grey area with lots of complexity. I think the general advice for mixed occasions would be to avoid them if possible. If that’s not possible, consider the main purpose of the event and if in doubt, separate out. Don’t forget, your accountant is there to help out and provide advice and guidance on these tricky areas where answers might require a bit more thought or research.

How about gifts?

Generally gifts are considered entertaining and not allowed as a taxable expense, but there are a few exceptions.

Free samples of trade goods aren’t considered to be entertaining.

Small gifts of less than £50 (not food, drink, tobacco or a voucher or token) are allowed providing they contain a conspicuous advertisement for the donor. So giving a customer one of your branded golfing umbrellas or a mouse mat is fine and not considered to be entertaining.

Business can also give gifts to staff providing they are less than £50 in value and not cash or a cash voucher. These fall under the trivial benefits exemption and don’t have to be declared as benefits in kind.  The gift must not be provided as part of a contractual obligation or in recognition for services or employment duties. The exemption is design to cover things like birthday celebrations, Christmas presents or wedding presents.

The VAT rules on gifts are similar with a £50 annual limit on business gifts whether to customers or employees. Any more than this and the gift has to be treated as if it was a sale for VAT purposes.

Are there differences between the taxes?

Although the rules on entertaining are covered by a number of different areas of legislation and various HMRC manuals, they are actually pretty consistent across VAT, corporation tax and income tax. There are some differences or clarifications in relation to particular taxes. However overall the outcome is usually the same.

Generally you should consider that if a particular expense is disallowed as entertaining for one tax, then it would also be disallowed for the others as this will most often be the case.

There are exceptions of course (nothing in tax is ever 100% straightforward) and this article can only give a brief overview. So if your business does have a particular situation where more complex tax treatment may apply or you need further advice or clarification, this is something that your accountant can help you with. If you’d like to chat to us about this then just send an email to tax@cooperfaure.co.uk.

Self Assessment is changing. Will you be affected by Making Tax Digital for Income Tax?

Maybe you’ve never heard the term Making Tax Digital for Income Tax?

Unless you’re a VAT registered business, Making Tax Digital might be something that has never crossed your path. But for many people who submit a self assessment tax return, it’s a name you’ll have to get familiar with very soon.

If you’re a sole trader or property owner, the decisions you make about your business in this tax year (2022-23), could affect whether or not Making Tax Digital will be looming on your horizon.

What is Making Tax Digital?

Making Tax Digital (MTD) is a government initiative and forms a key part of their plans to make it easier for individuals and businesses to get their tax right and keep on top of their affairs. HMRC’s ambition is to become one of the most digitally advanced tax agencies in the world and the Making Tax Digital programme is part of this transformation.

Progress so far

Stage One was Making Tax Digital for VAT (MTD VAT). After a few false starts and delays, the first part of MTD came into force on 1 April 2019 for VAT registered businesses with turnover above the VAT threshold (and any other VAT registered businesses who wanted to join the scheme voluntarily).

This year on 1 April 2022 the scheme was extended to cover all VAT registered businesses whether above or below the VAT threshold.

MTD for VAT involves submitting the quarterly VAT returns electronically via MTD compatible software. For many people this means using cloud software such as Xero or Quickbooks, but there are also many other software solutions.

Next Steps – Income Tax

But HMRC are not content to rest on their VAT laurels, despite some additional delays. They’re very busy working away to get things ready for the roll out of Making Tax Digital for Income Tax (MTD ITSA) on 6 April 2024.

“But that’s ages away”, I hear you say. It may feel that way now, but time has a nasty habit of ticking on very quickly. There are definitely some things that you need to think about now, the most important being, will you be affected?

Who will Making Tax Digital for Income Tax affect?

If you’re a sole trader or a landlord then definitely read on. This is also useful for partnerships too, as you will be included in the next stage. If you just have employment or pension income and/or investment income without any self-employment or property, then MTD ITSA won’t apply to you.

MTD ITSA on 6 April 2024 will affect sole traders and landlords with business or property income over £10,000.

Before you decide that you are below this threshold, there are a few things that you need to bear in mind:

The £10,000 is income, not profit. It’s how much you make in sales or rent, whether or not you make a profit or a loss.

If you have self-employment and property then the £10,000 income is the combination of both. So if you have £6,000 self-employment as a sole trader and £5,000 property rental income then you will be under the threshold for the individual areas, but still in scope overall.

There are some exemptions: people with income under £10,000, trusts, estates, trustees of pension schemes and non-resident companies. Also individuals who can show it is not reasonable or practical for them to use computers or the internet.

Anyone else is in scope. If you are domiciled or resident outside the UK and complete a self-assessment then only the UK self-employment and UK property is in scope.

When will my income be assessed?

The initial income assessment to determine if you are over the £10,000 threshold will be made based on the tax year whose filing deadline falls immediately before the start date of MTD ITSA.

This means that if you are currently running a business or renting out property, then it’s this current tax year from April 2022 to March 2023 that will be used for the income assessment. The filing deadline for 2022-23 is 31 Jan 24, so this is the filing deadline immediately before the MTD start date of 6 April 2024.

So business and property decisions and performance in this tax year, will be what affects whether you are initially in scope of MTD ITSA in 2024-25.

The assessment will continue to be made each tax year and you would join in the tax year that starts immediately after the filing date for the year that you go over the threshold.

If you were out of scope initially in 2022-23 but your income grew over £10,000 in 2023-24, then the filing deadline for that year would be 31 Jan 2025 and you would have to join MTD ITSA from April 2025.

What does it mean if I’m in scope for Making Tax Digital for Income Tax?

If you are in scope based on your income for the tax year 2022-23, from 6 April 2024 you’ll need to:

Keep digital records.

Use MTD compatible software for your submissions.

Send quarterly summary updates of the business income and expenditure to HMRC.

There will be an End of Period statement for each business (self employed and property) at the end of the fourth quarter in March.

There will be a Final Declaration submission for each individual by 31 Jan (similar to the existing self-assessment deadline).

The MTD ITSA quarters will be 5 July, 5 Oct, 5 Jan and 5 April (or can be 30 Jun, 30 Sept, 31 Dec and 31 Mar).

There are separate reports each quarter for each income type and tax. So if you have a VAT registered self employed business and a rental property, that is three quarterly submissions: one for self employed income, one for VAT and one for property income. The VAT quarter timing may be different to the income quarters.

Another thing to note is that different types of property count as different businesses. If you have UK rental property, that is considered to be a separate business to UK furnished holiday let. Other separate property businesses are EEA holiday let (European Economic Area) and overseas rental property.

If you have 3 rental properties and one holiday let then you would have two business to report. One rental property business with the total figures of the 3 rental properties and one holiday let business with the figures from the one holiday let property.

This all sounds hugely complicated!

Well – yes and no.

A lot will depend on how organized you are with your business finances (or how organized you can get before your MTD ITSA start date) and whether you are already using compatible software.

Most of the larger accounting and bookkeeping software packages already have an MTD VAT solution in place and are currently trialing their MTD ITSA solutions in conjunction with the HMRC pilot scheme. You can check with your software provider or ask your accountant if you aren’t sure about the product you are using.

What do I need to do now?

If you are already using compatible software and updating your records on a regular basis, then you’ve got a head start. At this stage there is not much more that you need to be doing. Just keep up to date with the latest MTD ITSA developments and software progression so that you’ll be able to learn how to use any relevant new features and how to make the submissions (if you plan to do them yourself).

If you’re used to doing your books annually (either yourself or with your accountant), then this is going to be a big change for you. It would be really beneficial to get into the habit of doing your books more regularly, at least quarterly but ideally monthly. This will set you up for Making Tax Digital and you’ll see other benefits, such as helping to manage cashflow and making more informed business decisions.

If you aren’t currently using any software for your business or property, then now is the time to start investigating your options. If you work with an accountant they’ll be able to help and advise on this and suggest what might be suitable for you. Ideally you want to be using a software solution from April 2023 so that you’re comfortable and familiar with everything well in advance of the roll out date in April 2024. It gives time to overcome any initial teething problems.

If your accountant does your bookkeeping then hopefully they will have plans in hand for the transition and will be able to give you more information.

Can I start with Making Tax Digital for Income Tax now?

HMRC is already running a pilot in conjunction with many software providers. Currently the only way to sign up for the pilot is through a software provider. So if you’re keen to get on board now and see what it’s all about, then check your software provider and talk to your accountant.

What about Partnerships?

Partnerships where each individual has income over £10,000 need to sign up by 1 April 2025.

What about Limited Companies?

These will be further down the line with no specific date provided yet for Corporation tax.

Wait, what, I need to know more detail!

MTD ITSA is still very much a work in progress with HMRC. The general scheme framework and deadlines have been set and the pilot is underway, but there are currently still some grey areas and finer details to be resolved. As the deadline approaches more and more of the detail will be clarified so it’s worth keeping up to date with MTD ITSA developments through your accountant or software provider. If you have a question that can’t be answered right now, there may be an answer in a few months time.

How can we help?

If this article has got you thinking that you might need to make some changes, then maybe we can help? We’re already working with our self assessment clients to prepare them and make sure they will be fully compliant for Making Tax Digital for Income tax. If you’re ready to take the first steps towards going digital, then we’re ready to support you. Just send us an email to tax@cooperfaure.co.uk and we can chat further.

What is the difference between being self-employed and a sole trader?

‘What is the difference between being self-employed and a sole trader?’ is a question that we are frequently asked.

The definition of self-employed is someone not employed and paying Income Tax through PAYE.  In other words, you are running your own business and pay your tax due through your personal tax return.

However, it also means that you are fully responsible for the success or failure of your business.

Self-employed defines the way you work not the business structure.  There are three options for this – a sole trader, business partnership or limited company – read more here

As a sole trader you own the business outright.  You and your business are seen as one blended legal and financial entity.  As such you would be personally responsible for any loan, credit agreements or unpaid bills. 

Even though a sole trader can be VAT registered and have employees, there is a perception that this is a smaller operation than a limited company. However, there is a lessened level of paperwork.

In summary, a sole trader is self-employed but you can be self-employed but not a sole trader.

Whichever is the best option for you, there are statutory requirements to register to your business before you start trading.

What is a Sole Trader?

“What is a sole trader?” is a question that we are often asked. There are three key considerations in deciding whether setting up as a sole trader is right for you:

To set up as a sole trader, you need to notify HMRC that you intend to pay Income Tax and National Insurance through a personal tax return. 

If you are not already submitting a person tax return, you will need to register and then file a tax return every year.

You can trade under your own name or you can choose a trading name for your business. 

You do not need to register your name but there are some rules.  Sole trader names must not:

You must include your name and trading name, if you have one, on official paperwork such as invoices, quotes and letters.

If you do opt for a trading name, it is advisable register your name as a trade mark to prevent anyone else using the same name.

You must register for VAT once your turnover exceeds £85,000 in a twelve-month period.   However, you can register voluntarily if it suits your business.  The consideration is who you sell to and whether they can reclaim the VAT.

If you are intending to work in construction industry as a subcontractor or contractor, you will also need to register with HMRC for the Construction Industry Scheme.

Although you are self-employed, your business can have employees paid under PAYE and can register with HMRC for this as and when needed.