As a business owner, you will incur costs when you are out and about for your business, such as:
- Travel costs for travelling to temporary workplaces or your customers/clients
- Coffees, drinks and meals bought for clients/customers while discussing business
- Subsistence costs incurred while staying overnight for a training event, seminar or client visit
The big question is, are these travel, meals and subsistence costs tax deductible?
The short answer is, they are treated differently depending on the exact situation. As a result, we often see owners incorrectly dealing with these in their book-keeping.
The good news is that there are some broad ‘rules of thumb’ which are easy to follow once you get in the habit. Here are the top three mistakes and simple ways to avoid them.
Mistake 1: Not capturing costs at all
If you’ve incurred some tax-deductible costs and not entered them into your records, you are basically putting money in the bin with every receipt. This often happens when you have not used your business bank account to pay for them for some reason.
The easiest way to keep track is to let technology do much of the work. If you keep your records in an accounting app, you can use the same or a second app to capture the costs and simply export/add into to your accounting software.
You could use:
- A stand-alone app such as ‘Dext’
- The in-app features of QuickBooks and Xero
These apps use your phone’s camera to take an image of a receipt and send it to ‘the cloud’ for processing. Some apps will even extract some of the details on the receipt for you, and pop the figures straight into your accounting app. So, always Shop and Snap – don’t walk away from any till without taking a photo of the receipt!
If you prefer not to send details to an accounting app, then there are other apps that could help.
If you aren’t digital with your record keeping, then you need to come up with a solid system for capturing costs and adding them into your accounting. Costs paid with personal funds will be a key priority for you.
Mistake 2: Categorising them incorrectly
As we said at the start, there are different tax treatments for the different types of expenditure.
In general, the following are often tax deductible:
- Travel costs to a temporary workplace
- Your hotel costs for an overnight stay for a training course
- Your evening meal whilst you stayed at the hotel (‘Subsistence’)
In general, the following are usually not tax deductible
- Coffee you buy out of office for you and your client whilst discussing business
- Lunch you bought for you and your customer whilst discussing business
You can see why it’s critical to categorise them correctly in your records to get the correct tax treatment. There is nothing worse than trying to remember a year later if that £8 in Costa was you buying a cake and tea whilst travelling, or two coffees for a client meeting!
In some predefined account set ups, you will see a heading labelled ‘Meals and entertainment’. As you can see from the above, this could end up being a mix of tax deductible / not tax deductible. It’s best to rename this to ‘Entertainment’ and make new categories for items like ‘Subsistence’ in your book-keeping software or spreadsheet.
Remember, it’s generally ok to pay for business ‘entertainment’ out of your business bank account. It’s just that, by default, it is not tax deductible.
Mistake 3: Accounting for the cost twice in your records
Whilst we love tech and encourage you to use it, on occasion it can be easy to accidentally double account for a transaction.
For example, we often see an uploaded receipt in an accounting system, and also the bank transaction. You are effectively left with a cost entered twice in your records:
- As a bank transaction categorised directly as a cost
AND
- As a ‘bill’, usually sitting showing as ‘unpaid’
In accounting software, the key will be to ‘match’ the bank transactions with the bill, so you do not effectively enter it twice.
This can also happen in spreadsheet records where an owner has categorised the bank transactions, and then kept another separate categorised log of their receipts.
Take time to fully understand how to use any tech or app to make sure your workflow doesn’t cause these issues.
Keep records of all costs
To ensure you obtain the correct (and hopefully the maximum legal) tax deductions, be sure to:
- Capture all costs, especially those paid personally. Consider technology to help.
- Understand how your technology works to ensure you don’t double enter the cost.
- Understand and set up multiple categories of expenses to get the right tax treatment.
I’m still confused about tax-deductible costs and expenses
Ask your accountant or book a consultation with us. We offer a paid 1 hour, 1-2-1 consultation so you can ask us simple questions to get the help you need, when you need it.