How to shrink your tax billPosted on: 07 March 2012 by Lynne Thomas
The tax year ends on the 5th April, here are some tips to keep your expenses and tax allowances ship shape.
If you’re self-employed or run your own business, you’ll know that there is a huge amount of information and regulation to navigate through when it comes to allowable expenses and tax relief. If asked, most people would probably say they had a fair idea of what can and can’t be claimed for.
But it might not be as clear-cut as you think.
After speaking to some of our clients recently, we found there were a lot of ways people were being inefficient with their tax allowances and expenses. Partly because they hadn't realised that some of their expenses cannot be claimed on and also because they were not making full use of the allowances and tax relief that are available to them.
When it comes to the nuts and bolts of tax, a good accountant will be worth their weight in gold to you. To get the very best service for you and your business, you need a good independent financial adviser who will work alongside your accountant and your solicitor, too, if you have one. After all, every captain needs a reliable crew.
If you’re self-employed, you can claim for expenditure that is ‘wholly and exclusively’ for carrying on and earning the profits of your business. That's fairly straight-forward. But what about expenditure when entertaining clients, suppliers and customers? Or hospitality at events? This is where the waters get a little bit muddy.
According to Her Majesty's Revenue and Customs (HMRC), claiming for entertainment costs for your clients is not allowed. Neither is claiming for ‘work’ clothes (unless there is a protective/branded element to the clothing). (1)
And whatever you do, don’t take your clients out to lunch unless you’re happy to foot the whole bill yourself, because you won’t be able to offset the cost off your tax return. Although, it must be said that HMRC are kind enough to let us reclaim our own lunch, dinner and even a bottle of wine.
The waters get even more complicated to navigate when it comes to how much expenditure you can claim for the office, garage or workshop you use at home. There are several ways to calculate it that HMRC find acceptable, including as a percentage of 'floor usage' or as a percentage of usage.
For example, John uses one room at home as his office, exclusively for the purposes of his trade. The room represents 5% of the floor area of the house. His Council Tax, Buildings & Contents Insurance, Mortgage Interest and electricity bills total £4380 per year. He claims 5% of this, which is £219.
Some bad news on the horizon is that the current annual threshold for claiming capital allowances is reducing – currently you can claim up to £100,000; however, from April 2012 this will reduce to £25,000 which could have a significant impact on businesses who are investing in new equipment. (2)
So if expenses aren't efficient when it comes to tax, what is? Pensions for one thing as you will receive tax relief on your pension contributions at various levels up to a maximum of 50% depending on your tax rate. If you haven't got any pension arrangements in place yet, it could be well worth your while having a chat with your adviser about this.
There may well be other areas of your business finance arrangements which could be reorganised, too, to give you further savings and tax relief. If you have business mortgages or loans, there may be savings to make by restructuring these.
Speak to your financial adviser who will be able to take a look at all aspects of your business, including expenses, financing and pension arrangements to make sure you’re on course for tax efficiency.
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