Tag: expenses
Do you have to charge VAT when you buy things for clients?
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:
- you paid the supplier on your customer’s behalf and acted as the agent of your customer
- your customer received, used or had the benefit of the goods or services you paid for on their behalf
- it was your customer’s responsibility to pay for the goods or services, not yours
- you had permission from your customer to make the payment
- your customer knew that the goods or services were from another supplier, not from you
- you show the costs separately on your invoice
- you pass on the exact amount of each cost to your customer when you invoice them
- the goods and services you paid for are in addition to the cost of your own services
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.
An example of an invoice showing disbursements and recharges
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:
| Activity | Fee |
|---|---|
| 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:
- it was purchased for the use of the client
- the client agreed that the consultant would arrange and pay for it on their behalf – this means the consultant agreed to act as the client’s agent
- the consultant passed the whole £150 charge on to the client, without adding anything, as a separate item on the invoice
- it was the client’s responsibility to pay for the goods
- the consultant had permission from his client to make the payment
- the client knew the web hosting package was from another supplier and not from the consultant
- the consultant showed the costs separately in the invoice
- the web hosting package paid for by the consultant is additional to the other services being billed to the client
The consultant’s invoice to their client for this work might include the following items:
- design services – £2,500
- travelling expenses – £300
- amount on which VAT is due – £2,800
- VAT at 20% – £560
- disbursements – £150
- total including VAT – £3510
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What are the rules on subsistence and travel?
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
Subsistence includes:
- any necessary subsistance in the course of the journey
- the cost of meals at a temporary workplace
- the cost of meals as part of an overnight stay
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
Scale rate payments
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:
- agreeing a scale rate with HM Revenue and Customs (HMRC) by providing evidence of typical expenses (eg receipts)
- using HMRC’s benchmark scale rates for subsistence costs
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What can Nurses claim against tax?
There are special tax deductions available to Nurses including midwives, auxiliaries, students, dental nurses, nursing assistants and healthcare assistants.
Laundry & Clothing
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….
https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim67200
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:
- shoes: where the wearing of a prescribed style is obligatory in the hospital or other workplace in which they may work allow £12 per year
- stockings/tights/socks: where the wearing of a prescribed style or colour is similarly obligatory, allow £6 per year.
Mileage
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:
- Home to Hospitals – Disallowed
- Hospital to Hospital – Disallowed as Business Expenses (but could be allowed against Employment)
- Visits to Patients – Allowed
Approved Tax Free rates per business mile
| Type of vehicle | First 10,000 miles | Above 10,000 miles |
|---|---|---|
| Cars and vans | 45p | 25p |
| Motorcycles | 24p | 24p |
| Bikes | 20p | 20p |
Travel to a Temporary Work Place
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:
- the 24 month rule, see EIM32080
- the fixed term appointment rule, see EIM32125
- the depots and bases rule, see EIM32160
- the area rule, see EIM32190
https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim32075
EIM32125 – Section 339(5) ITEPA 2003
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.
https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim32125
Professional fees and subscriptions
Professional Fee and subscriptions Royal College of Nursing (under N) are reclaimable and HMRC have a list of approved fees
Training & Courses
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 ([2010] 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:
- the employer gets the tax deduction
- the employee is not taxed on the cost and
- there is no National Insurance to pay.
EIM01210 confirms this.
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What expenses can the self employed claim?
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…
http://www.hmrc.gov.uk/courses/SYOB3/syob_3_exps/html/syob_3_exps_menu.html
Pre Trading expenses
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.
You can check more about pre-trading expenses legislation.gov.uk or at HMRC.
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.
In order to find out which method works best for you, you can use the Government expense checker
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.
https://stevejbicknell.com/wp-content/uploads/2014/05/workers.jpg
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]
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If you are self employed have you tried the HMRC Simplified Expenses Checker?
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:
- 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.
Costs you can claim as allowable expenses
These include:
- 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
Use this checker to work out which method is best for you.
What you 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
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Beware of letting your accounts become a shambles
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 argued…
- “Section 203(2) ITEPA does not grant any right to retrospectively make good a benefit. Income tax is an annual tax, and the value of the benefit depends upon what is made good in that tax year.”
- “Any “rewriting” [to reflect the money reimbursed to RSL] would have a retrospective effect on the Company accounts.” HMRC implied that this would not be allowed.
HMRC won the case, but mainly because the accounts were in a terrible shambles!
What can we learn from this?
- Keep good records, don’t put off doing your accounts!
- If you do get behind you do a have a ‘reasonable time to make good’ as noted in HMRC’s manuals http://www.hmrc.gov.uk/manuals/eimanual/EIM21121.htm
steve@bicknells.net
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What are tax implications if a company pays a Directors personal expenses?
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
- Pensions – Up to £40k can be paid in to you pension scheme by your employer (2015/16) and you can use carry forward to pay in even more
- Childcare – Up to £55 per week but check the rules to makesure your childcare complies (HMRC Leaflet IR115) – new rules coming soon
- Mobile Phone – One per employee
- Lunch – Tax Free Lunch Blog
- Cycle Schemes – Cycle to Work Blog
- Fitness – Fitness Blog
- Parties and Gifts – Christmas Blog
- Parking – Parking Blog
- Business Mileage Allowance – 45p for the first 10,000 miles then 25p
- Long Service Award – A bit restrictive as you need 20 years service, the tax free amount is £50 x the number of years
- Eye Tests and Spectacles – The Eye Test must be needed under the Health & Safety at Work Act
- Suggestion Schemes – Suggestion Scheme Blog
- Insurance such and Death in Service and Income Protection – Medical Insurance Blog
- Travel Expenses – Travel Blog
- Working From Home – Working from Home Blog
Private Use of Company Assets
It may also be worth considering private use of company assets.
- The cost of the asset is allowed against Corporation Tax and you can claim Capital Allowances and the Annual Investment Allowance.
- The Assets could be purchased from the Director but they must be transferred at Market Value.
- The Benefit In Kind is generally 20% of the market value
steve@bicknells.net
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What tax allowances can childminders claim?
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.
Household expenditure
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 |
| 10 | 8% | 2% |
| 15 | 12% | 4% |
| 20 | 17% | 5% |
| 25 | 21% | 6% |
| 30 | 25% | 7% |
| 35 | 29% | 9% |
| 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.
Car expenses
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.
Other costs
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
steve@bicknells.net
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Simplified Expenses – Working From Home
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 |
Example
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.
https://www.gov.uk/simpler-income-tax-simplified-expenses/working-from-home
Alternatively you could claim you can claim a proportion (based on the number of rooms and hours of business use) of your household expenses
- Mortgage interest or rent
- Council tax
- Water rates
- Repairs and maintenance
- Building and contents insurance
- Electricity
- Gas, oil or other heating costs
- Cleaning
- Telephone (based on usage)
- Broadband
You can draw up a home rental agreement to reclaim these costs.
The Rental Agreement can be very basic, it just needs to show:
- The Parties – Employee, Company, Home Office Address
- The agreement is for use of the accommodation, furniture etc (‘the Home Office’)
- The hours it will be used
- The rental charge
or your could use an agreement like this one
https://www.rocketlawyer.co.uk/documents-and-forms/home-office-space-agreement.rl#
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.
http://stevejbicknell.com/2013/01/06/what-are-the-tax-issues-and-advantages-of-a-home-office/
steve@bicknells.net
