Nobody wants to pay more tax than they need to, but sole traders and directors of limited companies commonly pay unnecessarily high tax because they simply don‘t realise the extent of expenses that they can claim against their income.
HMRC states that expenses which are incurred “wholly and exclusively” for the purpose of your business can be claimed against your income. But, beyond that, there are “other expenses” that could possibly be claimed but have a personal element to them as well, such as holidays, entertainment and leisure.
In tax, there is a confusion over what “wholly and exclusively” means, and what the purpose of the expenses was.
So, let‘s look at holidays and leisure expenses that, if done correctly, you can claim – but if you’re not careful, you won‘t be able to claim at all.
Holidays are another expense that most people don’t expect to be able to claim against but, again, if done correctly, you can. This is an area where there’s a lot of confusion but here are three common scenarios:
- Extending a business trip: You need to go on a business trip to, let’s say, Las Vegas, and since you’re going there you decide to spend an extra day or two to do some shopping or sightseeing. There’s a great myth that because you’ve mixed business with pleasure, you can’t claim any of the trip expenses because now the trip has “dual purpose” and according to tax laws, you can’t make a claim for such a trip. But that’s not applicable if the primary purpose of the trip is business, that’s the key thing. But the only amount that you can’t claim against is the extra cost of staying in Vegas a bit longer. Make sure you keep proper records, notes and also board minutes to document the main reason for the trip.
- Taking your spouse: All you have to do is separate the cost; your spouse’s flights will be disallowed but your flight will be allowed and so on. So, simply put, as long as the primary purpose of the trip is business, you can claim against any cost in relation to that. Other non-business related costs will be disallowed.
- Turning holiday into a business trip: This is when you absolutely cannot claim expenses against your income. When you go on holiday and the purpose of the trip is personal but then you decide to do some business while over there, you’ve waived your right to claim any expenses. Because the purpose of the trip was personal, you can’t claim any of the cost incurred while doing business.
- Mixing pleasure with business: Let’s say you’re on a business trip somewhere nice and decide to go to the beach, without incurring additional cost. That doesn’t mean you’ve ruined the chance of claiming the cost of the trip against your income. Because the original purpose of the trip was for business, you can still claim the whole amount through the company. All you have to do is keep receipts for everything that you’re meant to be doing on the business trip and claim that against your income, your little fun on the beach doesn’t matter. Why because there is no additional cost and it’s just an incidental benefit from the main business purpose.
- School fees, care home fees, staff holidays, and even dance lessons
All of these can be claimed as a business expense in certain circumstances and if you run your business through a limited company rather than sole trader or partnership.
If you provide your employees with vouchers that they can exchange for a holiday, HMRC allows you to claim against that, as long as you report this cost as a benefit to your staff.
So as a director, you can have your company pay for your holiday, the company reports this as a benefit – much like a company car or medical benefits – then pays Class 1 National Insurance on the cost and you as an employee pay tax on it, either 20 or 40 percent. Then, the company can claim the cost of this benefit against its income. Is it worth it? Yes, because the company would have to pay a higher tax on the holiday cost if it went through the payroll. This goes for school fees or care home fees too or leisure such as dance lesson and gym membership etc.
There is a helpful guide on HMRC’s site under their expenses and benefits section on this so if you’re not using a tax adviser or an accountant, you might find it useful.
Finally, make sure you get the paperwork and evidence right. Otherwise, you might be paying more tax than you have to, allowing your business to bleed money that it perhaps can’t afford.
Jonathan Amponsah CTA FCCA is an award-winning chartered tax adviser and accountant who has advised many clients over the last decade of tax-deductible expenses. Jonathan is the founder and CEO of The Tax Guys. He is also the co-founder of Easy Tax Returns (a tax return app to help taxpayers avoid stress, penalties and find their peace). @easytaxreturns