Understanding what you can and can’t claim as a business expense is important, especially if you are just starting your business. This article outlines what you can claim as a business expense, if you can claim without a receipt, and how to easily keep track of your business expenses with invoicing & accounting software.
Most businesses are aware that they can claim their business expenses as a deduction on their Self Assessment tax return. However, it is less commonly known that you can claim pre-trading costs from before you started your business. In fact, most pre-trading expenses and expenses incurred in your first year of business can be claimed.
What can I claim as a business expense?
HMRC states that you can claim expenses that are solely for business purposes. This may include office costs, insurance, business rates, marketing costs, capital allowances, and staff salaries, to name only a few.
However, there are some business expenses that cannot be claimed. This includes entertainment costs (for instance, a staff party or client lunch), asset depreciation, and non-essential renovations to your business premises.
Put simply, anything that your business spent that is necessary for operating your business can be claimed as an allowable expense. Any expense that is used for personal reasons, or any costs that are not essential to operating your business, should not be claimed.
You should speak to your accountant if you are in doubt about what you should and should not claim as a business expense. All records should be kept for at least 6 years from the end of the financial year.
Business expenses for non-VAT registered businesses
Whatever type of business you own, keeping an accurate record of your expenses is important. However, different rules apply depending on whether or not your business is VAT registered. The following information details expense reporting for non-VAT registered businesses.
Do I need an expense receipt?
As a general rule, you should always keep a record of your business expenses, whether it be an invoice or payment receipt. However, if it's not possible to get a receipt, you forget to request one, or simply misplace it, don't panic. There are still ways you can claim for the expense.
You should claim all business expenses that are necessary for your business operations. If you do not have a receipt, make sure that you have detailed notes about the transaction. For instance, who you purchased from, the date, the location of the sale, etc. You can also use your bank statement as proof of purchase as long as it is a business account.
For instance, let’s say you pay in cash for parking expenses that are essential to your business operations. You cannot get a receipt, so you make a note of the cost, the location, and the parking company. The more details, the better. As long as you have a detailed description of the costs and an accurate amount, this should satisfy a tax inspector.
How much can I claim without receipts?
In the UK, there is no rule on the amount that you can claim without receipts. However, it should be reasonable to be accepted by a tax inspector. For example, if your business is claiming several business expenses, and only 5% of them do not have receipts, but detailed notes, then this should be OK in the eyes of HMRC.
On the other hand, if you are only claiming expenses for which you do not have any receipts, this might be a red flag in the eyes of a tax inspector.
If you choose to claim an expense without a receipt, make sure you have other proof of the transaction, either on a bank statement or as detailed notes. You need to be able to demonstrate that the expense is solely for business use, and the amounts have been recorded and calculated accurately.
Business expenses for VAT registered businesses
The advice above is for non-VAT registered businesses. If you are VAT registered and want to reclaim VAT on an expense, you must have a valid VAT receipt if the expense is over £25. Even if the expense is less than £25, you should still have a receipt if possible.
For VAT claims, detailed notes and bank statements may not be acceptable proof. If you do not have a proper VAT receipt, you should speak to your accountant to determine whether you can include the expense on your VAT Return.
Keep track of your expense receipts with invoicing software
If you are thinking about claiming your business expenses, there is software that can help you easily keep track of your expense records. With invoicing software, instead of putting a receipt in your pocket to mysteriously go missing, you can simply take a picture of the receipt from an app. This will automatically input the details of the expense on your account.
Debitoor invoicing software uses optical character recognition to scan the text of documents and create an expense record in less than a second! You will always have an overview of your business expenses on a computer, tablet, or phone, and be able to see any expenses that do not have a receipt or invoice attached.
In addition, you can connect HMRC directly to your Debitoor account to submit VAT Returns in a few clicks. Any expense or invoice created on the account will automatically update the fields on your VAT report.