How a single receipt can save you tax

Picture the following scenario. You’re buying a train ticket to go and visit a client and suddenly realise you can’t remember the PIN number for your business debit card, so you have to pay with your own cash.

Sound familiar? Most freelancers will have found themselves in situations where they’ve had to spend their own personal money for business reasons. But do you remember to record those costs in your business as out-of-pocket expenses? And what happens if you don’t remember, or if the train ticket is swallowed up by the exit barrier when you arrive and you don’t have a record of it?

Here, Emily Coltman, chief accountant at FreeAgent, an online provider of accounting systems for freelancers, explains why it’s a good idea to record all your out-of-pocket expenses, and gives her top tips on how to make sure none of them are overlooked.

Reason 1: It’ll save you tax

If you leave costs out of your business accounts, that means your profit will be too high, because income minus costs = profit. And, because tax is payable on profit, to miss out costs means you’ll be paying more tax than you need to.

Hands up who wants to do that? I thought not.

Also, if you’re the director of a limited company, and you’ve spent your own money on company costs, that is nearly always money that the company can pay you back without incurring extra tax. If you don’t record the cost, but you still take the money out of the company bank, then this could appear that you’ve taken out more than the company owed you overall - which is a potential tax time bomb.

Reason 2: It’ll give you accurate information

As already shown, missing costs out of your business accounts artificially inflates your business’s profit. That means that you’ll think your business, or an individual project within your business, has earned more than it actually has - which is not necessarily a good thing.

In extreme cases, a project might look like it’s made a profit and earned money overall, when in actual fact, if you included all your costs, you’d have seen that the project actually lost money. This should be a trigger to make a change, such as putting your prices up for that customer.But if you don’t know that the project made a loss, because not all the costs were included, you might end up throwing good money after bad. Also, if these are costs you paid for yourself, not including them would leave you personally out of pocket, because your business would not be able to pay you back for them.

So how can you ensure you’re claiming all of your expenses and your business doesn’t miss out?

Tip 1: Have a system

We’ve established that including all your costs is a good idea. But how can you make sure you do that?

You need to put a system in place that suits you and your business. That could be either having a lever-arch file with plastic punch pockets, or a big envelope, for each month’s out-of-pocket expense receipts.Or keep them in a separate compartment in your purse or wallet.

Then, each month, set aside some time to post these receipts into your accounts. Remember also to keep a mileage log for journeys travelled on business in your own car. This is a cost you can claim, too.

Tip 2: Record as you go

Some receipts need to be recorded quickly, for example, the train ticket that will be swallowed by the automatic gate as you leave the station at the end of your journey. And if you think that you’d mislay other receipts by the time you get home, then you need to adapt your system to work on the move, so consider a mobile app.

Bear in mind though, HM Revenue & Customs says that a soft copy of a receipt is acceptable proof that you incurred the cost - so if you do this, then you don’t need to worry about keeping the receipt, and you can happily watch the station exit barrier eat your ticket!

Tip 3: Keep bank receipts and out-of-pocket receipts separate

One of the most common causes of mistakes in small business accounts is to mix up what the business paid for directly, with what you paid for from your own pocket.

It is important to keep these separate, and to record them correctly as bank payments or bills for costs that the business pays for, or out-of-pocket expenses if you paid for them yourself. Mixing these up can lead to confusion, repaying yourself the wrong amount from the business, and an increased accountant’s bill - so make sure that your system separates these two receipt types. For example, mark business debit card receipts with a ‘B’ for Bank, or have a separate envelope or folder for receipts from bank transactions.


29th May 2013

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