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If you’re an employee or a director you might be able to get tax relief for business expenses you’ve paid for. These include the cost of professional fees or subscriptions, business travel and subsistence, tools and specialist clothing.
1. What counts as a ‘tax-deductible’ expense?
You can only get tax relief for business expenses you’ve paid for and if they were for the cost of:
- travelling you had to do in doing your job
- other expenses you had to pay in doing your job – and which related only to doing your job
You can’t ask for tax relief if your employer has already reimbursed you for the expense and has agreed a ‘dispensation’ with HM Revenue & Customs (HMRC).
1.1. Key allowances and reliefs
Business mileage or fuel
You may be able to get tax relief for business mileage when you use your own vehicle on business, or for fuel you buy when you use a company car. You can’t claim, though, for your normal commuting costs.
Business mileage is mileage you travel doing your job. It can include travel to a temporary work place.
Tax relief for business mileage in your own vehicle
You may be able to get tax relief for business mileage if you use your own vehicle for work. It can be a car, van, motorcycle or cycle.
You are only entitled to Mileage Allowance Relief if your employer pays you:
- no mileage allowance
- less than the approved amount.
If your employer pays you more than the approved amount, you’ll have to pay tax on the extra.
Tax relief for fuel when using a company vehicle
If you pay for fuel when using a company vehicle for business travel you can get tax relief on fuel costs, less any payments repaid by your employer and covered by a ‘dispensation.
What are business journeys
These are when, as part of your job:
- you have to travel from one workplace to another – this includes travelling between your main ‘permanent workplace’ and a temporary workplace
- you’ve got to travel to or from a certain workplace because your job requires you to.
Travel expenses that qualify for relief
You can get tax relief on the necessary costs of business travel like public transport fares, hotel accommodation, meals, tolls, congestion charges, parking fees, business phone calls, fax or photocopying costs.
The cost of travel between your home to your normal place of work is NOT unallowable. It is called commuting.
Professional fees and subscriptions
You can ask for tax relief for the cost of fees and subscriptions you pay to some approved organisations – but only if you have to pay them, or if it’s helpful for your work.
You may get tax relief on professional fees and subscriptions if:
- you have registered, obtained a licence or become a member of the organisation in question because it’s necessary to your work
- HM Revenue & Customs (HMRC) has approved the organisation you’re a member of
Tools and specialist clothing
If you have to spend money on tools or specialist clothing for your job you may be entitled to either:
- tax relief for the actual amounts you spend
- a ‘flat rate deduction’
If you have to provide small tools (ex: scissors for an hairdresser) or buy specialist clothing for your work – like a uniform or protective clothing – you may be able to get tax relief for the cost of them.
Flat rate expenses
Flat rate deductions are amounts that HM Revenue & Customs (HMRC) has agreed nationally – or sometimes locally if conditions are very different – with trade unions or other bodies. The deductions cover what’s typically spent each year by employees in different trades. For example, someone working in the clothing industry can get a deduction of £60 each year.
The allowances cover items that you have to provide so that you can do your work. They’re to recognise that assets or equipment lose value as a result of general wear and tear – or depreciation. (likely to last for at least two years).For example: a desk for your work. There are some exceptions – cars, vans, motorcycles and cycles don’t count.
The Annual Investment Allowance (AIA) which allows a 100% tax deduction for expenditure on equipment is currently £200,000 p.a. .
Household expenses when working at home
You may be able to get relief for some household expenses and some travelling costs if you work from home. You might also be able to get capital allowances for capital expenditure.
The household expenses include:
- the extra cost of gas and electricity to heat and light your work area
- business telephone calls
You won’t be able to get relief on domestic expenses that you’re paying anyway – like your mortgage or council tax. You also won’t be able to get relief for expenses that relate to both business and private use – such as your telephone line rental, or Internet access.
1.2. How much relief you can get
For payments of up to £4.00 per week, or £18 per month for monthly paid employees, you don’t need to provide any records of the household expenses you’re claiming relief for. For amounts above £4.00 you will need supporting evidence to show that the amount you are claiming is no more than the additional household expenses you have actually incurred.
2. Travel and subsistence costs
You may be able to get relief for the cost of business travel – for example if you need to visit a client or go to a temporary workplace. You can also ask for relief for ‘subsistence’ – the cost of meals and overnight expenses.
You can generally reclaim the VAT on travel and subsistence expenses where a director, partner, sole proprietor or employee is away from their normal place of work on a business trip.
You must pay for the actual cost or a proportion of the actual cost of these expenses. You cannot reclaim VAT on travel and subsistence expenses when you pay an employee a flat rate for these expenses.
Travel and subsistence expenses include:
- rail or air transport (although these are generally zero-rated for VAT)
- use of a private or hire car
You cannot reclaim VAT on employee travel or subsistence expenses that are:
- in full or in part business entertainment expenses for VAT purposes
- for non-business use such as a holiday
3. Business entertainment and VAT
Generally, you cannot claim back the VAT on business entertainment expenses. Business entertainment is defined by HM Revenue & Customs (HMRC) as any form of free or subsidised entertainment or hospitality.
It makes no difference whether the person being entertained is an existing customer, a potential customer or any other person who is not an employee. The following are not employees for VAT business entertainment purposes, and so if any of these are present at an entertainment or other event, it is considered to be business entertainment and you cannot claim back the VAT:
- pensioners and former employees
- job applicants and interviewees
- non-employee shareholders
Examples of business entertainment
Business entertainment expenses include:
- food and drink
- accommodation – eg hotels
- theatre and concert tickets
- sporting events and facilities
- entry to clubs and nightclubs
- use of capital assets such as yachts and aircraft
- payments made to third party business entertainment organisers
- free samples
- business gifts
- when you provide entertainment or hospitality only for the directors or partners of your business
4. When you can reclaim VAT on business entertainment
There are two specific exceptions to the general rule that VAT cannot be reclaimed on business entertainment expenses:
- Recognised sporting bodies. VAT can be reclaimed if the body provides through necessity free accommodation and meals to amateur sports persons and officials who attend an event.
- Airlines. VAT can be reclaimed if an airline provides catering and accommodation for passengers who have been delayed.
5. Mixed business entertainment expenses and other business expenses
You can only reclaim VAT on the proportion of your expenses that are not used for business entertainment and are used for business purposes. For example, if you entertain employees and customers together, you may be able to reclaim VAT on the proportion of expenses that relate to employee entertainment – see the section in this guide on employee entertainment and expenses.
But you cannot reclaim any VAT at all if the sole purpose of the business entertainment is to entertain a non-employee – for example, if you or your employees act as a host to a non-employee.
6. Business gifts
A business gift is a gift of goods that is made in the course or furtherance of your business, and you can normally reclaim VAT on its purchase.
Business gifts cover a wide range of items from brochures, posters and advertising matter to expensive goods of the kind given as ‘executive presents’.
You do not have to account for VAT on business gifts made to the same person where the total cost of all the gifts does not exceed £50 in any 12-month period (and not the figure of £15 given in VAT Notice 700/35). For this purpose, it is acceptable for you to adopt any 12-month period that includes the day on which the gift is made.
Where the total cost of any business gifts made to the same person in any 12-month period exceeds £50 and you have been entitled to reclaim VAT, you will normally have to account for VAT on the total cost value of all the gifts.
Sometimes you might give away free samples of your products for people to try. Free samples are treated differently for VAT and you don’t have to account for VAT on a free sample you give to another person or business if you meet certain conditions.
Gifts to employees
7. Employee entertainment and expenses
7.1. Employee entertainment
If you provide entertainment to reward your employees for good work or to maintain and improve staff morale, this is considered to be for business purposes and so you can claim back the VAT. Examples could include staff parties, team building exercises, staff outings and similar events.
However, you cannot claim back the VAT in either of these circumstances:
- When non-employees are included in the event (this is business entertainment, not employee entertainment).
- When the entertainment is provided only to directors, sole proprietors or partners of the business (where directors or partners attend staff parties together with other employees, you can claim the VAT back).
The following are not employees for VAT purposes. If any of these people are included in an event, then it is considered to be business entertainment – not employee entertainment – and you can’t claim the VAT back:
- pensioners and former employees
- job applicants and interviewees
- non-employee shareholders
7.2. Employee expenses
People employed by you, and directors, partners or anyone managing the business may be entitled to claim back VAT on certain expenses such as travel and subsistence incurred for the purpose of the business.
8. What is a VAT invoice
8.1. What a VAT invoice must show
A VAT invoice must show:
- an invoice number which is unique and follows on from the number of the previous invoice – if you spoil or cancel a serially numbered invoice, you must keep it to show to a VAT officer at your next VAT inspection
- the seller’s name or trading name, and address
- the seller’s VAT registration number
- the invoice date
- the time of supply (also known as tax point) if this is different from the invoice date – see below
- the customer’s name or trading name, and address
- a description sufficient to identify the goods or services supplied to the customer
- the rate of any cash discount
- the total amount of VAT charged expressed in sterling
For each different type of item listed on the invoice, you must show:
- the unit price or rate, excluding VAT
- the quantity of goods or the extent of the services
- the rate of VAT that applies to what’s being sold
- the total amount payable, excluding VAT
If you issue a VAT invoice that includes zero-rated or exempt goods or services, you must:
- show clearly that there is no VAT payable on those goods or services
- show the total of those values separately
If you make retail sales and you make a sale of goods or services for £250 or less including VAT you can issue a simplified VAT invoice – see the section in this guide on simplified VAT invoices.
Tax point or time of supply
The tax point, or time of supply, is the date when a sale is considered to take place for VAT purposes. There are rules that tell you if this is the date of the actual supply, the date of the invoice or some other date, depending on the circumstances.
It’s important to put the right date for the time of supply on your invoice, because both you and your customer will need this information to make sure the VAT on the invoice is accounted for on the right VAT Return.
You must also issue invoices within a certain time of the actual supply taking place – see the section in this guide on time limits on issuing invoices.
If your customer pays in cash you must, if they ask you to, show on the VAT invoice that you have received payment and when you received it.
8.2. When a VAT invoice must be issued
If you are registered for VAT you must give any VAT-registered customers a VAT invoice for any standard-rated or reduced-rated goods or services you sell them.
If you are a retailer, you do not need to issue a VAT invoice or receipt unless your customer asks for one.
As a VAT-registered supplier, you may be liable to a fine if you do not issue a VAT invoice for a supply you have made when asked to do so by a VAT-registered customer.
There is a time limit within which VAT invoices must be issued – see the section in this guide on time limits for issuing VAT invoices.
8.3. When a VAT invoice must not be issued
You must not issue a VAT invoice in the following situations:
- you are not registered for VAT
- you and your customer use self-billing arrangements or you use authenticated receipts – see the link below
- you make a gift of goods on which VAT is due – see the link below
- you are selling goods using the VAT margin scheme for second-hand goods – instead, there are different rules you must follow on your invoice – see the link below
- you are selling goods using the Tour Operators’ Margin Scheme
- you are issuing a ‘pro forma’ invoice – see the section in this guide on pro-forma invoices
8.4. Pro-forma invoices
If you need to issue a sales document for goods or services you haven’t supplied yet, you can issue a ‘pro-forma’ invoice or a similar document to offer goods or services to customers.
A pro-forma invoice is not a VAT invoice, and you should clearly mark them with the words ‘This is not a VAT invoice’.
If your potential customer accepts the goods or services you’re offering them and if you actually supply them, then you’ll need to issue a VAT invoice within the appropriate time limit – see the section in this guide on time limits for issuing invoices.
If you’ve been issued with a pro-forma invoice by your supplier, you can’t use that to claim back VAT on the purchase. You must obtain a VAT invoice from your supplier.
For further information, please contact:
Euro Accounting Ltd
Phone : +44 (0)778 986 2405