Taxing times are here again (and the Taxman won't buy you lunch)
Happy new year everyone!
Happy 2011/12 tax year, of course, which starts today. Being as it is traditional to make resolutions at the start of a new year, we thought a great one would be to pay less tax.
However, that could be easier said than done, as tax and benefit changes coming in today will set every household back an average of £200 a year. One way to achieve a lower tax bill is to claim more expenses against your income, but unfortunately there are rules that needs to be followed to avoid 2011 being the year of the taxman...
Employed v Self Employed
The first point to note is that the expenses you can claim are different, depending on whether you are employed or self-employed. Generally, if you are employed, your first point of call with expenses is to get your employer to reimburse them, if that is the policy. Besides the fact that this is easier and you will get the money quicker, obtaining tax relief for expenses is only going to give you relief at your marginal rate of tax- a maximum of 50%- whereas if you employer gives you the money back, you will get the full 100% in your pocket.
But claiming additional expenses can be more difficult for employees. The problem is that the expenses incurred have to be necessary for the performance of duties in order to obtain relief, a condition that does not apply to the self-employed. However, in both cases the amount claimed must be “wholly and exclusively” for business use.
So here is a round up of the top expenses you may be able to claim- and the right way to do it:
Most people will have heard of the standard mileage rate that HMRC allows for business travel. For many years this was fixed at 40p per mile, and took account of wear and tear of the car as well as fuel used. However, given the unprecedented ridiculousness of petrol prices, last month’s Budget increased this to 45p per mile for the first 10,000 miles a year, with effect from today*.
Your employer is under no obligation to pay you this standard rate, and if he pays you more, you will be taxed on it as a benefit in kind. If he pays you less, however, which could be more common now the rate has increased, you can claim the difference between the rate you get and the standard rate as a deduction from your income. Note that the mileage rates for company cars are different (between 10p and 24p a mile depending on fuel and engine size) as these account for fuel only.
Also, please remember that mileage from home to work does not count as business mileage. Unless your permanent work place is your home.
Working from home
Claiming expenses for working from home is a no-brainer for the self-employed, but harder for the employed - as the expense must be considered necessary, you must be required to work at home in order for any costs to be deductible.
However, assuming costs are allowable, you can use any reasonable basis for calculating how much of a deduction you can claim - if you use one room in your house solely for business purposes, then a reasonable basis would be to claim one room’s proportion of your household bills. If that room was only used for business purposes 50% of the time, then half a room’s proportion would do. Alternatively, HMRC admit in their manuals that an estimate of £2 a week (or £104 a year) would be reasonable and would not require further investigation.
Other work-from-home costs that you may incur include things like phone bills and internet access. However, unless you have a dedicated business line and business internet, the standing charge or line rental for these services will not meet the wholly and exclusively test, and should not be claimed in any proportion. Business calls or data charges will, however, be allowable in full.
Entertaining and Eating
Lastly, entertaining, whether it is business related or not, is never an allowable expense for tax purposes. If you have an employer who furnishes you with an entertaining account, or who agrees to reimburse you for these costs, that’s great, but if not, it’s your dime. Perhaps you may want to think about changing that booking at The Fat Duck then...
The costs of eating breakfast or an evening meal if away on business are allowable expenses, even if your employer will not reimburse you, but lunch is not. The rationale is that you would have to eat lunch anyway, so the cost is not wholly incurred for business purposes. It’s keeping you alive as well (not an allowable purpose).
Whatever your business or employment though, make 2011/12 the year that you start keeping all your receipts and making sure you claim for every business expense going- that way you will keep more money in your pocket, rather than lining George’s.
*the mileage rate for more than 10,000 miles per annum remains at 25p per mile. Obviously fuel gets cheaper the more you buy. Oh wait, no it doesn’t...