When you buy things for your client on their behalf the items could be excluded from your VAT calculations if they are Disbursements
To treat a payment as a disbursement all of the following must apply:
It’s usually only an advantage to treat a payment as a disbursement if the supplier didn’t charge VAT on it, or if your customer can’t reclaim the VAT.
A website design consultant based in London does a week’s work for a client in Edinburgh. The consultant visits the client’s premises at the start of the week to discuss the project. The consultant also agrees to purchase a website hosting package from an Internet service provider on behalf of the client.
The consultant and the client agree the following fees:
|Consultant’s work||£2,500 plus VAT|
|Consultant’s travelling expenses||£300|
|Website hosting package purchased on the client’s behalf||£150|
The £300 travel cost that the consultant recharges to the client is not a disbursement so the consultant must charge VAT on it. But the cost of the website hosting package is a disbursement and can be excluded from the VAT calculation, because:
The consultant’s invoice to their client for this work might include the following items:
One of the most frequently asked questions from business owners and employees is ‘how much can I claim for meals and travel?’
Its such a common question that HMRC have a specific notice (490 Employee Travel) which explains the rules with examples
Here are some of the key points:
Section 1.7 Tax Relief
If an employee is obliged to incur travelling in the performance of their duties, provided the journey isn’t ordinary commuting they employee is entitled to tax relief on the full cost of Travel.
Section 3.2 Ordinary Commuting
Ordinary Commuting is travel to/from a permanent place of work, normally from/to home
3.8 excludes Private Travel
3.12 states that Non Exec Directors traveling to the company for board meetings is Ordinary Commuting
Section 3.18 The 24 Month Rule
In summary if you work at temporary place of work for less than 24 months you may be able to get tax relief.
Section 3.36 Employees who work from Home
If an employee performs substantive duties at home, then it may be treated as their place of work.
Where this is the case travel to other work places will be business travel.
Section 5.1 The Amount of Tax Relief
If the trip qualifies as business travel then the full cost will be allowed for relief, you don’t need to try to save money on the cost of the trip!
Section 5.4 Subsistence
Section 5.12 Scale of Expenditure
Where the travel is unusually lavish HMRC will consider whether the trip is really a reward or part of remuneration, but this is rare and HMRC will not seek to deny costs because for example you travel first class rather than second class.
Section 8.4 Incidental Expenses
These are £5 in the UK and £10 when overseas per night to cover expenses such as Laundry, Phone Calls and a Newspaper
Section 8.14 Unpaid Directors
Unpaid directors are entitled for relief for any they receive to cover travel
If you provide your employees with a set amount of cash for some common business expenses like travel and meals, these are known as ‘scale rate payments’.
As long as your employee has actually spent the scale rate payment on business expenses, you won’t need to check every single receipt – it’s fine to just check a sample.
You can set up a scale rate payment by either:
There are special tax deductions available to Nurses including midwives, auxiliaries, students, dental nurses, nursing assistants and healthcare assistants.
Uniforms are normally not a taxable benefit and often provided by the employer.
Flat Rate Laundry Expenses https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim32712
|a. Ambulance staff on active service||185|
|b. Nurses, midwives, chiropodists, dental nurses, occupational, speech, physiotherapists and other therapists, healthcare assistants, phlebotomists and radiographers. See guidance at EIM67200 for shoes and stockings/tights allowance||125|
|c. Plaster room orderlies, hospital porters, ward clerks, sterile supply workers, hospital domestics and hospital catering staff.||125|
|d. Laboratory staff, pharmacists and pharmacy assistants.||80|
|e. Uniformed ancillary staff: maintenance workers, grounds staff, drivers, parking attendants and security guards, receptionists and other uniformed staff.||80|
If you are an employee who wants to claim the laundry allowance you should send HMRC a letter as follows:
Re: Uniform Tax Rebate
I have been employed at……… since….. My job title is ……. and I wear a company uniform.
I am obliged to launder the uniform, which is supplied to me by the company. I therefor wish to claim any payment to cover the laundry costs.
The uniform provided is not suitable to be worn outside of the work environment due to having the company logo on it.
I would like to receive the rebate in the form of a cheque….
Expenses deductions may be permitted to nurses of all grades including midwives, for expenditure incurred and defrayed by them on the repair and renewal of shoes and stockings/tights:
Nurses may need to travel between locations and the 2013 case of Dr Samad Samadian v HMRC defined the rules for mileage claims
The results of the case in summary were:
|Type of vehicle||First 10,000 miles||Above 10,000 miles|
|Cars and vans||45p||25p|
A workplace is a temporary workplace if an employee goes there only to perform a task of limited duration or for a temporary purpose. So even where an employee attends a workplace regularly, it will be a temporary workplace and so not a permanent workplace, if the employee attends for the purpose of performing a task of limited duration or other temporary purpose.
Limited duration is explained at EIM32080.
Temporary purpose is explained at EIM32150.
If a workplace is capable of being a temporary workplace by reference to this rule, you must consider the following additional rules:
A period of attendance at a workplace for a limited duration does not make that place a temporary workplace if the employee attends in the course of a period of continuous work (see EIM32080) that can be expected to last for all, or almost all, of the period for which he or she is likely to hold, or continue to hold, that employment. In these cases the 24 month rule (see EIM32080) is overridden and the workplace is a permanent workplace.
The legislation does not define almost all of the period of the employment. You should not normally challenge relief under this paragraph where the likely duration of work at a workplace is less than 80% of the likely duration of the employment.
Professional Fee and subscriptions Royal College of Nursing (under N) are reclaimable and HMRC have a list of approved fees
Doctors & Nurses often agree to pay for their own continuing training personally because of a shortage of NHS funds but when they do pay for courses its unlikely they will be able to claim tax relief.
EIM32530 states that it is well established that employees are not entitled to an expenses deduction under Section 336 ITEPA 2003 for the expenses continuing professional education (CPE). The Commissioners and the Courts have traditionally held that the duties of trainee doctors, for the purpose of the expenses rule, are limited to the clinical work that they do for the NHS Trust by whom they are employed. Their training activities are not undertaken “in the performance of” those duties for the purpose of Section 336 . That is so even though the training activities may be compulsory, and failure to complete them may lead to the employee losing his or her professional qualifications, and/or their job.
The Commissioners and the Courts upheld that view in a number of cases, as follows:
Parikh v Sleeman (63TC75) – a hospital doctor was refused relief for the expenses of attending training courses during periods of study leave.
Snowdon v Charnock (SpC282) – a specialist registrar was refused relief for the expenses of undergoing mandatory personal psychotherapy.
Consultant Psychiatrist v CIR (SpC557) – an NHS consultant was refused relief for the expenses of CPE necessary to maintain her professional qualification.
Decadt v CRC (TL3792) – a specialist registrar was refused relief for the expenses of taking professional examinations, even though it was a condition of his employment that he should do so.
In the recent case of Revenue & Customs Commissioners v Dr Piu Banerjee ( EWCA Civ. 843), the Court of Appeal accepted that a deduction for training costs incurred by an employee should be allowed if the employee was employed on a training contract where training was an intrinsic contractual duty of the employment (see also EIM32535 & EIM32546) and where any personal benefit, unlike most CPE courses, would be incidental and not therefore give rise to a dual purpose of the expenditure.
Salary Sacrifice solves this problem.
Salary sacrifice works particularly well for training because except in the most extreme cases, employees cannot claim a tax deduction for training costs that they pay personally but if the employer pays for training that is work-related:
EIM01210 confirms this.
The UK has seen the fastest growth in self-employment in Western Europe over the past year, according to the Institute for Public Policy Research (IPPR).
There are many types of expense that you can claim and HMRC have just created a new guide…
Many business owners incur in costs before they actually start in business. You can go back up to 7 years can claim costs as pre-trading expenses.
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:
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 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:
You can use flat rates for:
You must calculate all other expenses by working out the actual costs.
In order to find out which method works best for you, you can use the Government expense checker
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.
Employers are saving £6k by opting for Self Employed Freelancers…
A survey by PeoplePerHour has shown that the self-employed segment of the labour market in both the UK and USA is growing at a rate of 3.5% per year – faster than any other sector. Should this growth continue for the next five years, researchers predict that half of the working population could be self-employed freelancers by 2020.
The survey also suggests that small businesses that hire freelancers instead of full-time employees could save £6,297.17 per annum. The survey shows that the average waste or spare capacity for each employee in a SMEs is 1.9 hours per day.
The research identifies a number of key drivers behind the shift from employment to self-employment, including “the availability of ubiquitous and inexpensive computing power, sophisticated applications and cloud-based services“. [Lawdonut]
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 decide if it suits your business.
Simplified expenses can be used by:
You can use flat rates for:
You must calculate all other expenses by working out the actual costs.
Use this checker to work out which method is best for you.
It’s not uncommon for Directors and Senior Employees to get behind with their expense claims and paperwork, they are busy people trying to build their businesses and sometimes the paperwork gets put to one side.
But lets consider the recent HMRC case against the Directors of RSL (NorthEast) Ltd. Mr White was Director of RSL and he had a company credit card which he used for business and personal expenses, he travelled extensively on company business. Unfortunately RSL became insolvent, so HMRC assessed Mr White on credit card expenses as a benefit in kind.
Mr White appealed on the basis that he had lent the company large amounts of his own money and any credit card expenses were just a reimbursement.
HMRC won the case, but mainly because the accounts were in a terrible shambles!
What can we learn from this?
It’s not uncommon for Directors personal expenses to get mixed up with business expenses, for example the director is out buying things for the company and picks up some items for themselves at the same time and it goes on the same bill.
In a perfect world the Director would just repay the cost of personal purchases to the company, but we don’t live in perfect world, so what are the options?
Directors Loan Account
You could post the cost to the Directors Loan Account. These accounts are normally repaid when the Director is paid either salary or dividends.
If the loan is not cleared by year end then the company will have to pay a temporary corporation tax charge of 25% and reclaim the tax when the loan is repaid using form L2P
There may also be a notional amount of interest (4%) charged as a benefit in kind on the loan.
Benefit In Kind
You could have the expenses as a benefit in kind, some benefits may even be tax free, here is a list of my favourite tax free benefits
Private Use of Company Assets
It may also be worth considering private use of company assets.
Childminders work in their own homes and are paid by parents for looking after their children, often while the parents are at work. Profits from childminding are usually chargeable to Income Tax as trade profits, although some occasional childminders’ profits may be chargeable as miscellaneous income.
Many childminders are members of the Professional Association for Childcare and Early Years (PACEY), formerly known as the National Childminding Association (NCMA). HMRC entered into an agreement with the NCMA on the expenses that will be allowed as deductions from childminding income.
The agreement is based on the hours that childminders work and not on the number of children they care for. A childminder looking after a child on a full time basis for 40 or more hours each week is entitled to claim the full time proportion of expenses.
How this works is illustrated in the following table:
|Hours worked||% of Heating and lighting costs||% of Water rates, Council Tax and Rent|
|40 (full time)||33%||10%|
The full time figures shown in the table should be scaled down from depending on hours worked.
Wear and tear of household furnishings
A deduction of 10% of total childminding income may be made to cover the wear and tear of furniture and household items. This is intended to include household items which are not used wholly and exclusively in childminding. A childminder claiming this deduction may not, however, claim relief for the cost of replacing such household items. Reasonable costs of cleaning household items where the need for cleaning is as a result of childminding activities may be allowed as a separate item.
The agreement also covers the following expenditure:
Food and drink
Reasonable estimates for the costs of food and drink provided for the children being cared for are acceptable and receipts are not required.
Where appropriate, childminders can use the simplified expenses mileage rates. However, if the childminder wishes, the actual cost of car expenses for childminding purposes can be claimed instead.
Also allowable – the cost of toys, outings, books, safety equipment, stationary, travel fares, membership fees or subscriptions to your childminding organisation, public liability insurance premiums and the actual cost of telephone use for childminding purposes.
You can find further details in BIM52751
Most people working from home were claiming the £4 per week allowance based on HMRC guidance, but this has now been updated for the self employed.
You can now calculate your allowable expenses using a flat rate based on the hours you work from home each month.
This means you don’t have to work out the proportion of personal and business use for your home, eg how much of your utility bills are for business.
The flat rate doesn’t include telephone or internet expenses. You can claim the business proportion of these bills by working out the actual costs.
You can only use simplified expenses if you work for 25 hours or more a month from home.
|Hours of business use per month||Flat rate per month|
|25 to 50||£10|
|51 to 100||£18|
|101 and more||£26|
You worked 40 hours from home for 10 months, but worked 60 hours during 2 particular months:
10 months x £10 = £100
2 months x £18 = £36
Total you can claim = £136
Use the simplified expenses checker to compare what you can claim using simplified expenses with what you can claim by working out the actual costs.
Alternatively you could claim you can claim a proportion (based on the number of rooms and hours of business use) of your household expenses
You can draw up a home rental agreement to reclaim these costs.
The Rental Agreement can be very basic, it just needs to show:
or your could use an agreement like this one
If the rental is only to cover costs (and not to make a profit) then it should not create any tax liability.
Some experts say that claiming Mortgage Interest and Council Tax can be queried but that would depend on circumstances.
There are also other isuues to consider such as VAT and Capital Gains and these are covered in the blog below.