Company Directors: Why You Should be Making the Most of Tax Relief Allowances
We look at the taxes your small business needs to be aware of and how to reclaim allowable business expenses...
As a company director, you’ve already got your head round all the legally enforceable regulations that govern your role. You have taken on the responsibilities directorship entails and kept the interests of the company at the heart of your decision making.
Your record keeping and company accounts are maintained through clear, scrupulous systems; and a crucial part of your financial management is the administration and payment of relevant taxation. As unpopular as it is inevitable, there is one upside to the tax system – allowances!
Nobody wants to miss out on their entitlement so here we look at what you need to pay and what you can claim back…
The main business taxes: What you need to be aware of
Her Majesty’s Revenue and Customs (HMRC) establishes the rules and you are legally responsible for making sure your business follows them. Here’s some of the main ones you have to know about:
Value Added Tax (VAT)
- There are different ways to pay VAT, most small limited companies choose a quarterly VAT return. Whatever you decide is best for your company, you must have a plan sorted.
- If you predict earnings of more than £81,000 in 12 months or you are voluntarily registering for VAT, you are obliged to tell HMRC. For more information check out the government’s website here.
Pay As You Earn (PAYE)
- To set up the PAYE system you have to register with HMRC.
- You also need to have the correct software to administer a PAYE system. This is called Real Time Information and means that HMRC can alter employees’ tax as and when there are any circumstantial changes. For further details, look here.
- There is an HMRC registration process to follow to pay Corporation Tax.
- You must file the correct return form (CT600) by the end of 12 months after the end of the accounting year.
- You must pay this tax by the end of nine months and one day after the end of the accounting year. For more information on how to pay corporation tax, check out our guide here.
Know your deadlines!
Financial statements, annual returns and self-assessment tax returns all have their own deadlines – and there are serious consequences if you do not meet them.
Nearly 2,000 company directors are prosecuted every year because of missed deadlines or because forms did not include all of the relevant information.
So, get organised and get the dates, with preceding timely alerts, in your calendar.
Tax Allowances: How to reclaim your business expenses
As a business owner you can get some money back into your company’s account by claiming for allowable business expenses.
Tax relief essentially means that the higher the amount of business expenses you claim, the lower your taxable profit amount will be. Paying Corporation tax means that you lose 20% of your profits before you get a dividend. By taking off the amount you claim in business expenses, you can decrease how much profit is taxed at 20%. For example:
- Allowable expenses claimed: £4,000
- Company Turnover: £25,000
- Amount taxed at 20% Corporation Tax: £25,000 – £4,000 = £21,000
HMRC cannot just automatically calculate these figures and return your money to you – you must make an official claim. Therefore it’s essential that directors understand the basic rules surrounding business expenses and that you keep accurate records and evidence for all claims (this evidence must be stored for six years after the date of the claim before they can be recycled).
The fine print: What businesses need to know
HMRC’s regulations are designed to be applied to individual circumstances and therefore each one tries to cover every possible eventuality within that particular area but this results in a complicated set of rules that can be rather daunting. A straightforward list of ‘things you can and can’t claim’ doesn’t actually exist and many people consider it wise to seek professional help when submitting a claim.
There are two key terms that frequently crop up:
- Dual purpose: This is an item that can be used in and out of work and will probably not be given as a business expense by HMRC. Even this is not as clear cut as it seems, because sometimes the dual purpose is considered ‘incidental’ and would be a legitimate claim. For example, protective clothing that you are obliged to wear for work that you could also wear outside work.
- Allowable expense: If HMRC deems something “wholly and exclusively” necessary to do your job, then it is an ‘allowable expense’. These are the claims you want to be submitting and HMRC will gladly reimburse.
What are these ‘allowable expenses’?
There are simply too many to list them all here! These are just three of the possible allowable business expenses that are most frequently claimed for. It illustrates HMRC’s approach to the detail of each regulation.
- Work travel in your personal vehicle: This is a very comprehensive tax relief that includes tolls, congestion charges and parking fees. The complexity here is in defining what HMRC classes ‘work travel’ to be. It is not daily journeys between home and a permanent workplace. But it is for work journeys you make between different work locations or to a ‘temporary workplace’ (which is somewhere that you will work for up to 24 months). As director you also need to show that you have work at a different place after the present two year contract is completed.
- One tax-free event is allowed per year and traditionally firms have used this allowance to cover the company Christmas party. Rather unsurprisingly, there are limits as to what you can claim for.The maximum per head amount is £150.00, including VAT. This could be divided between different events but those attending must be staff and a ‘plus one’. Details of your spend will be scrutinised and evidence will be needed – so keep your receipts.
- Start-up costs: This is a great allowance that means any costs you paid while setting up your company are treated like an ongoing expense. It covers all the essentials like stationery, accountancy advice and initial office equipment and supplies purchases. Uncrumple those receipts and reclaim your money!
There are a whole host of other business expense tax allowances that you could be eligible for. Some have another HMRC definition of ‘reasonable’ cost to contend with, like the rules governing accommodation and subsistence during business trips. Others are less well known and are subject to the ‘dual purpose’ clause, such as the section on spectacles and eye tests.
There are real gains for your company if you don’t let the apparent complexities of the system put you off making your legitimate claims. As director, you need to arm yourself with the necessary knowledge, seek professional advice when needed and raise tax relief awareness among your employees.
This article was provided by Paul Donohoe, Managing Director of TaxRebateServices.co.uk.