Are you claiming your expenses against tax?
By the time you actually start trading, you may have spent thousands of pounds on research and setting up the business.
Provided you have formally notified HM Revenue & Customs that you have started up a business, most of these costs are usually allowable as business expenses in the first year.
In this blog, you will find relevant information on Pre Trading expenses, Simplified v's Actual expenses and Capital Allowances on equipment.
Pre Trading expenses
Many people incur in costs before they actually start in business.
Some of these people aren't aware that costs incurred before you start the business (but not more than 7 years before) can be claimed, so it often means that they have no tax to pay in the first year because of the pre-trading costs.
Let's says you want to start a home based business, you need to create an office at home or build an office in the garden. This means that you have building costs as well as equipment costs before you start trading. These costs are submitted to the new business as an expense claim by the owner on the first day the business starts.
Also you might have legal cost for contracts or renting offices or equipment, you could have costs for product development, stock, samples, or even a motor vehicle.
However, what happens when you have paid VAT prior being VAT registered? You can reclaim any VAT you are charged on goods or services that you use to set up your business.
Normally, this will include:
- VAT on goods you bought for your business within the last 4 years and which you have not yet sold
- VAT on services, which you received not more than 6 months before your date of registration
You should include this VAT on your first VAT return. If you have doubts as to whether you should be VAT registered or not, take a look at VAT Notice 700/1: should I be registered for VAT.
Simplified or Actual Expenses
Simplified expenses are a way of calculating some of your business expenses using flat rates instead of working out your actual business costs. You don’t have to use simplified expenses. You can just decide if it suits your business or not.
Simplified expenses can be used by:
- sole traders
- business partnerships that have no companies as partners
You can use flat rates for:
- business costs for vehicles
- working from home
- living in your business premises
You must calculate all other expenses by working out the actual costs.
Following, you can find costs you can claim as allowable expenses:
- office costs, eg stationery or phone bills
- travel costs, eg fuel, parking, train or bus fares
- clothing expenses, eg uniforms
- staff costs, eg salaries or subcontractor costs
- things you buy to sell on, eg stock or raw materials
- financial costs, eg insurance or bank charges
- costs of your business premises, eg heating, lighting, business rates
- advertising or marketing, eg website costs
In order to find out which method works best for you, you can user the Government expense checker anytime. You just need to know:
- You’ll be asked to make estimates about some of your business expenses – you don’t have to give accurate amounts
- This checker doesn’t give exact figures to use in your tax return, it gives you an idea of which way of calculating your expenses might be best for you
- Limited companies aren’t eligible
Don’t forget Capital Allowances and the Annual Investment Allowance
Buying equipment, even if it's on finance, is a great way to reduce your tax bill, the 100% AIA can be used on the date you buy the asset.
Currently, the Annual Investment Allowance is £500,000 and this has been reduced to £200,000 in January 2016.
It is not necessary to claim the maximum capital allowances available or even claim them at all, crazy as it might sound there are situations when not claiming capital allowances can reduce your tax bill!
Sole Trader Example
The personal tax allowance is currently £10,600 (2015/16)
Let's assume profits are £15,000 and Capital Allowances available are £5,000, so that would reduce taxable profits to £10,000 which would waste £600 of the personal tax allowance.
It would therefore be better to only claim £4,400 in capital allowances and claim the remaining £600 in the following year.