Expenses within the business
“Beware of little expenses. A small leak will sink a great ship.” – Benjamin Franklin
It is very worthwhile to set out an expenses policy early in the life of the business even if the only one claiming is the owner. The bookkeeper can then work to an agreed policy and keep records appropriately.
The claiming of expenses either formally or informally is a frequent area of error, concern and sometime surprise and so a little understanding is worthwhile.
- There are expenses that are actually benefits and therefore taxable to the individual as a benefit in kind.
- There are expenses that are allowable for the employee to claim and not taxable but cannot be regarded as legitimate for offsetting against corporation tax for the company.
- There are expenses that are allowable for the employee and also for the company and can be included as legitimate business costs when calculating tax of either the individual or the company.
A bit of expertise at the beginning and a bit of planning can stop a nasty surprise later. The existence of a Director’s loan in the accounts for the owner who claims, mileage, car allowance, petrol costs and the lease cost of his car is a big surprise, but it is what you get from claiming the same expense four times in HMRC’s eyes.
Download our business plan template
Do the planning, work out which is the most tax and cash efficient programme depending on the nature of the business and then write the policy. Once done record keeping is everything;
People are often caught out by the last point – proper storage of expenses records. They claim, and the receipts go in the bin. Chucking out your receipts could land you in hot water though – so what are your obligations when storing your expense records?
How long do you have to keep expense receipts?
Six years. Yes – 72 long months. The self-employed (sole traders) have it slightly easier at just five years.
This lengthy period is for HMRC’s benefit, rather than yours. HMRC can choose to investigate your accounts up to six years in the past, and if they decide to come calling you must be able to back up every expense claim you made during that period.
What’s the best way to store records?
As anyone who has ever held a rail season ticket will know, printed receipts are fragile things. Even a few weeks nestled at the bottom of a wallet is enough to render most illegible. If you’re a business that generates plenty of expenses, six years of records is a serious amount of paperwork too.
For these reasons – and many more – it’s a much better idea to scan your receipts and back them up online. HMRC even encourage businesses to keep their records digitally these days. It’s also important to make sure you scan the reverse side of any receipt that also has information on it – many shops print double-sided receipts. You should also make sure you can access the digital copies easily should HMRC request them. There are a few exceptions to the electronic storage rule though –
HMRC asks you to keep the original documents which show you’ve had tax deducted. For example if you’re an employee your P60 form from your employer (which shows your pay and tax information for the tax year).
It’s also worth noting that “scanned” does not necessarily mean you need to invest in a scanner – as long as all the information is legible, a photo from your smartphone is perfectly acceptable.
The payment of expenses can also be a minefield in terms of timing and control.
Efficiency dictates that submission and payments should be done on a regular timetable, day of the week, day of the month or even alongside payroll. This avoids accounts staff or bookkeeper’s workflow being disrupted by urgent calls for money.
The best managers of expense policies are the accounts team or bookkeepers, spend time setting the policy and then leave them to control it.