Myth busters: Before you file a tax return in the UK

As a business owner, one of the common misconceptions you may have is that you’ll be able to claim all your expenses. Unfortunately, this is not the case! You can only claim expenses which have been necessarily incurred in generating your business income. If some expenses have both a business and a private element, you can only claim the business proportion of your expenses - and even then there are certain rules you’ll need to follow.​

Over the past few years, it has become increasingly common to work from home. This has led to many business owners asking whether or not they’ll be able to claim home office expenses when it’s time to file their tax returns.​

You can either work out the exact costs of your household bills and the proportion to allocate as business expenses, or you can use the simplified method.​

The flat rate allowance varies based on the number of hours worked per month and is £10 for 25 to 50 hours, £18 for 51 to 100 hours, and £26 for 101 hours or more. For instance, if you worked 40 hours from home for ten months and 60 hours for two months, you can claim a total of £136 (£100 for ten months and £36 for two months).​

All motor vehicle expenses can be claimed as expenses if your vehicle is used solely for business purposes, all motor vehicle expenses (fuel, maintenance, servicing, insurance, MOTs, replacement tyres, and similar). Business purposes don't include school drop-offs, going to the supermarket, or travelling between home and work (the only possible exception here is when your home also acts as your office).​

When a sole trader or partnership chooses to use a business vehicle privately too, the costs need to be separated to reflect this. You will need to maintain a logbook to claim business expenses in this case, recording all travel for both business and personal. Take note of the distance, date and reason for each trip. This information can then be used to know how much you can claim, using one of two methods:​

If you claim capital allowances on the purchase price of the vehicle, you will not be able to obtain a tax deduction through the flat rate expense method.​

There are several options for recording your mileage in a log book. Driversnote has created a very handy template which you can download here.​

Entertainment expenses are another tricky one. Once more, you can only claim entertainment expenses if they have helped you generate business income - however, the line between the business and personal elements can be blurry.​

There are also specific rules applied to different types of entertainment expenses. For example, some expenses are fully deductible, some are partly deductible and some are fully deductible (but need to be disclosed as an employee benefit). We have a detailed guide on entertainment expenses. ​

Tax on monthly memberships and subscriptions can be claimed back as long as they were incurred wholly and exclusively for the purposes of the trade.​

If you are self-employed and the trading course is directly related to your business, you may be able to claim the cost of the course as a deductible business expense. However, the course must be wholly and exclusively for the purposes of your trade or profession. This expense is not deductible if you’re attending a training course to provide a new service which isn’t already part of your offering.​

The case is the same for companies - you can deduct the expense of training courses for corporation tax purposes, as long as the courses are directly related to the company's trade or business. The expense must be incurred wholly and exclusively for the purposes of the company's trade, and not for any personal purposes.​

It’s important to declare all sources of income, regardless of how small they may seem. This includes your rental income, dividends, and cash sales. As a UK tax resident, you’ll also need to declare income earned overseas. The method by which you earned your income doesn’t determine your liability to pay tax.​

If you’re unsure, it’s best to double-check with your accountant. It also pays to contact HMRC, as they can still audit those who don’t make any profit or owe tax. ​

As mentioned, you can still face an audit without making a profit or paying tax. HMRC can still open an enquiry into those who don’t make any profit (or even owe any tax).  The UK tax system operates on a basis of “self-assessment”, so it’s up to you to make sure you file a return. HMRC can open an enquiry for a variety of reasons, regardless of the amount you earn or owe in tax. Some of these reasons include the following:​

It’s important to note that being selected for an enquiry doesn’t necessarily mean that you have done anything wrong. However, it is important to cooperate fully with HMRC and provide them with any information they request to resolve the enquiry as quickly as possible. More information can be found on their website.​

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While accountants can certainly help you prepare your tax return, it’s ultimately your responsibility to provide accurate information for filing. In the eyes of the HMRC, your accountant is not responsible for any inaccuracies or mistakes, so it’s important to review your tax return thoroughly before submitting it. Treat yourself as an active player in the preparation of your tax return, and a good accountant will make this a smooth process.​

Tax returns can be a complex and detailed process - but they don’t have to be. There are plenty of resources that can help, and hiring an accountant can make this even easier.  There’s lots of simple accounting software (such as Xero) to help you easily track your income and expenses.​

At Beany, we’re here to help business owners manage their accounting with ease. Get in touch with one of our problem solvers today to see how we can take the stress out of your next tax return.​

Read more: 7 ways to enrich your business with Xero accounting software.​

It’s a legal requirement to pay the taxes you owe, and the responsibility of declaring them to HMRC rests on you. Unfortunately, pleading ignorance with HMRC doesn’t usually work - failing to file a tax return in the UK can mean facing penalties, interest, and fines on top of the tax you owe. HMRC has various resources at their disposal to track who owes them taxes, even if an individual has not filed a tax return.​

In some cases, HMRC may simply estimate the amount of tax owed based on available information, such as business purchases against profits, and take enforcement action to collect the debt. It’s always best to file a tax return, even if you can’t pay the tax you owe, to minimise the risk of additional penalties and fines. In this case, filing a tax return and working with both HMRC and an accountant to resolve any outstanding tax debt is a responsible and proactive approach.​

Whether or not you need to file a tax return is dependent on your situation. You will need to file a tax return if any of the following apply:​

One grey area is if your only source of income is salary taxed through PAYE. In this case, you may not need to file a tax return. If you're unsure about whether you're required to file a tax return, it's a good idea to consult with your accountant or the HMRC.​

Deadlines are all too good at sneaking up on us. Mistakes are more likely to happen when under time pressure, which can only complicate matters further. If you file your tax return inaccurately, or late, you run the risk of facing interest and penalty fees.​

It's always best to file your tax return as early as possible and to give yourself plenty of time to gather all of the necessary information. To help with this, we have created a calendar to help you keep these key tax year dates in mind.​

If you’re self-employed or a sole trader, HMRC requires you to keep financial records (such as bank statements, receipts, invoices, and other documents) for at least 5 years after the 31st of January submission deadline of the relevant tax year.​

Companies must keep records for 6 years from the end of the last company financial year they relate to. HMRC may request to see these records at any stage within this timeframe to verify the accuracy of the information reported on your tax return.​

You can keep these records electronically, or as paper copies - organising them by date and category is a great way to ensure nothing goes missing!​

Keeping on top of your tax returns is a key component when managing any business. It’s important to be well informed on the UK tax laws, and this means steering clear of any misconceptions (and penalty charges!).​

At Beany, we’re here to help cut through the noise. From advice on how to calculate home office expenses to keep on top of key dates, your personal accountant will help you make tax returns a formality, rather than stress. Get started today!​