When you operate a small business via a limited company, you may find yourself paying for business expenses using your credit or debit card.
How can you properly record these so-called out-of-pocket payments in your business’s records and avoid paying additional tax when the company reimburses you for the expenses?
Emily Coltman FCA, head accountant of FreeAgent, explains.
Keeping track of your expenditures
If you pay corporate expenses out of your pocket, it’s critical to keep track of them separately from those paid from the firm’s bank account. This is because you need to know how much money the business has in the bank to cover critical expenses such as payroll and taxes. If you mix up out-of-pocket spending with charges that the business has already covered, you may experience fear because the firm’s bank balance seems to be smaller than it is.
Additionally, if HMRC audits your company’s records, the first thing they will look at is your record of what is in the company’s bank account. If they discover a discrepancy between that record and the bank statement, they may conclude that you are hiding income and levy extra tax obligations.
Be cautious of taxable repayments.
When you spend expenditures on behalf of the firm, you must record them as a cost in its accounts. This is referred to as ‘claiming’ such charges. The corporation may then reimburse you for your claim. Consider whether HMRC would consider any repayments made to you by the firm to be taxable income for you.
If the firm reimburses you exclusively for costs that HMRC approves of, the reimbursement will be tax-free.
However, the laws may be rather complicated regarding what HMRC considers acceptable. For instance, as a limited company director, you may generally deduct the expense of food and drink purchased while on company business. However, you would not be able to deduct the expense of the packed lunch you prepared at home to take with you on the road without paying additional tax when the firm reimburses you.
Additionally, you would be unable to claim the cost of clothes purchased for work purposes, even if you use those articles of clothing exclusively for business purposes, such as the cost of a suit for an architect or an attorney. You will be subject to additional tax when the employer reimburses you if you claim for them.
The following are the exceptions to the clothes rule:
- A uniform that identifies you as a member of your trade, such as a nurse’s uniform;
- protective clothes, such as steel-toed boots for construction workers;
- an entertainer’s costume, such as a wizard’s outfit for use as a children’s magician.
Your employer may refund you without adding additional tax if you claim them.
Avoid overlooking unforeseen charges.
Certain expenditures are often overlooked by business directors, which is a pity since missed charges increase the firm’s tax burden and leave the director out of cash.
The two most well-known ‘forgotten costs’ are as follows:
Mileage reimbursement for work travel in the director’s vehicle. You may claim 45p per mile for the first 10,000 miles driven in a tax year and 25p per mile after that. Be cautious about what constitutes ‘business travel,’ since some travels, such as those between your house and a ‘permanent workplace,’ do not qualify, and, if claimed, the reimbursement will be taxed.
Costs associated with working from home. Generally, you may deduct part of your home-running expenses if you work from home out of need rather than choice and are doing work that generates revenue for the business rather than solely administrative chores such as making up your accounts. The government has said that working from home because of necessity due to the coronavirus epidemic, such as during a lockdown or because your customers have closed their offices, qualifies as working from home. Consult FreeAgent’s advice here to see how much you may be eligible to claim.
Consult your accountant if you have any doubts about whether you may claim a certain item without incurring additional tax when your firm reimburses you.