When it comes to the businesses and self-employed builders that we help at VW Taxation, one of the major areas of confusion we tend to see is what business expenses can be claimed for.
As a small business ourselves working across Portsmouth and Hampshire, we understand that any little saving here or there is going to help tremendously. The trouble is business owners can be too busy to keep track of things or don’t really understand what kind of expenses are allowed and which will reduce the amount of tax they pay.
Here we take a closer look at the types of businesses expenses you can claim for and why proper record keeping will actually save you money in the long term.
Working From Home, Travel and Other Expenses
All businesses have running costs. Many of our clients are sole traders who are more focused on delivering their services than keeping paperwork. It’s worth taking a closer look at, however.
Sole traders will often use their home as their office which means they can claim part of the running costs such as utility or phone bills, repairs and insurance if they relate to the business. This also includes costs for things like stationery, office equipment and the like.
If you are travelling a lot as part of your work, which most of our construction clients are, you can claim for travel expenses. That means you should be logging your mileage and keeping receipts when you fill up at the petrol station.
Other expenses that you can include on your tax return include:
- Spending on advertising for your service or business.
- Clothing and equipment. Especially in the construction industry, having the right clothing and tools is vital and tax deductible.
- Financial costs such as liability insurance or health cover.
- Staff costs including subcontractors and employee salaries.
The long and the short of it means these allowable expenses all add up. As a result, these can have a significant impact on your final tax bill.
What Are Capital Allowances?
If you buy equipment or supplies for your business, you can take advantage of various capital allowances to help reduce your tax burden. These include:
1. Annual Investment Allowance (AIA):
This can be used for the purchase of equipment up to the value of £1m. And as a result can be deducted from your taxable profits. You can use it for almost any asset related to your business, including for-hire purchases (though not leased assets). If you want to buy a new van, for instance, you can offset your tax liability with AIA. You can’t, however, use it for buying a car.
One thing to bear in mind is, if you sell something that previously qualified for AIA, you may have to pay tax on the sale value when you find a buyer.
2. Enhanced Capital Allowance (ECA):
This was introduced to get businesses opting for more eco-friendly and sustainable solutions such as electric vehicles or energy saving equipment. This is likely to be available up to 2021. It means you can deduct 100% of any modification or purchase from your tax liability for the year in which you purchased.
3. Writing Down Allowance (WDA):
Anything that doesn’t fit into AIA or ECA can often be used in the Writing Down Allowance, including installing electrical systems, water heating systems, lifts and escalators, moving walkways and external solar shading. There are two different rates that you can use to offset your tax – 8% and 18% depending on the context.
For most self-employed contractors and small businesses, the AIA and ECA are going to be more relevant than the WDA.
Why Keeping Records is Important
We deal with many small businesses and sole traders at VW Taxation. One of the biggest challenges we know is maintaining accurate records. Much of this comes down to not understanding the tax benefits that can come from purchases and expenses and what is actually allowed. When businesses realise what they can save, it can change their opinion of record keeping overnight.
Many still have a last minute scramble when the tax due date is approaching as they try to get together all the right information and process it for HMRC. What this can mean is your business is often paying too much tax because you haven’t included this or that expense or missed something out because you were rushed.
Working with a professional accountant can make a big difference. We’re a small business ourselves so we understand completely how time-consuming and difficult maintaining records and filing tax returns can be.
Based in Portsmouth, we’ll ease you through the process and ensure that you claim all allowable expenses. TW Taxation can help educate you on the best way to keep records and maintain healthy accounts, especially since the Government is due to introduce Making Tax Digital on income tax returns in the near future.