Small Business Accountant
Work with UK-based Experts for tax, audit, accounting, payroll, & EIS/ SEIS needs.
One of the essential duties of a small businesses is to keep track of its spending. Your business spending will make up most of your tax return, and keeping precise records will help you pay less tax.
In the United Kingdom, small enterprises are critical to the economy. They account for 99.9% of the 5.7 million businesses in the UK.
Each year, around 50,000 SMEs fail because of cash flow problems. It is partly due to difficulties in obtaining resources and cash-flow issues.
Your expenses are one of the most significant aspects of the cash flow equation.
In this article, you’ll learn what expenses are, which ones you can claim, and how to claim them.
Table of contents:
● What do expenses mean?
● What are the different types of expenses?
● What Small business expenses can I claim?
● How to claim expenses UK
● When it comes to expenses, what do business owners often overlook?
● Final thoughts
What do expenses mean?
It is a cost incurred by a company to generate income.
Employee salaries, advertising expenditures, tax charges, insurance, water and electricity, stationery, fuel, and any other things, activities, or assets classified as necessary for running your small business all expenses.
Now that we’ve defined expenses, let’s look at the various costs a business might incur.
What are the different types of expenses?
1. Operating expenses
These are the expenses incurred by a company daily.
Operating expenses are recurring, short-term costs. The length of an accounting period is usually the same as your company’s financial year.
There are two Operating Expenses (OPEX) categories: direct and indirect.
● Expenses for selling, general, and administrative purposes (SG&A)
● Cost of Goods Sold (COGs)
SG&A expenses include everything except the costs of manufacturing the products your company sells. For example, paying rent or utility costs are examples of SG&A expenses.
COGs, on the other hand, are proportional to the cost of manufacturing a company’s goods or services. Your COGs, for example, might include the materials your company needs to sell coffee, such as cups and lids.
A. OPEX under SG&A expenses
SG&A is typically associated with a company’s overheads.
It includes the following operating expenses:
1. Charges for utilities
These are costs incurred in the payment of your utility bills. Water, gas, and electricity are examples of utility costs that your company incurs regularly.
2. Expenses for office supplies
It includes goods like stationery, tables, chairs, and printing supplies.
3. Charges for phone calls
These are the costs incurred by your company when using either a landline or a mobile phone.
4. Costs associated with travel
These charges include expenses incurred by you or your employees while travelling for official visits, meetings, and other relevant activities.
These charges may be occasional, but they must be shown as travel expenses on the income statement when they do happen.
5. Costs of legal representation
These are costs incurred when using legal services of any kind.
6. Insurance expenses
These are the costs of insuring your staff with general insurance, health insurance, or fire insurance.
7. Advertising expenses
These things have to do with promoting and advertising your brand or its items.
8. Bank charges
These costs include fees or charges a bank imposes for transactions carried out by your company.
B. OPEX under COGs
All costs directly linked with producing goods or services your small businesses sell during a given period are included in COGs (Cost of Goods Sold).
1. Freight-in costs
The cost of shipping that the buyer must pay when purchasing products.
2. Freight-out costs
It includes the cost of merchandise transportation. It refers to the transfer of goods from the supplier to the buyer.
3. Rental costs
Using rented equipment or property to support production-related duties and processes is an expense.
4. Product costs
It is the price of producing a single product unit sold to customers. Raw materials, Direct labour, direct overheads, and explicit material expenditures are all included.
5. Depreciation expenses
It is an asset’s value loss due to normal wear and tear. Depending on the products utilised at the creation time, this may or may not be applicable.
2. Non-operating expenses
These are expenses that your company incurs unrelated to its principal operations.
Here are some examples of a business’s non-operating expenses.
1. Interest expenses
The cost of borrowing money is the interest expense. It is the charge that a lender charges a firm for borrowing the lender’s funds.
Bank loans, bonds, convertible debt, and money borrowed from other sources are examples of this spending type.
2. Loss on disposal of assets
This expense incurs when your company removes an asset from its accounting records.
3. Obsolete inventory charges
These costs are associated with inventory that has reached the end of its product life cycle. This inventory is not sold or has been unused for a long time and is unlikely to be sold anytime soon.
Because it is effectively dead weight, this type of inventory can result in significant losses for a corporation.
4. Lawsuit settlement expenses
These are the costs of settling a lawsuit. These are classified as non-operating expenses since they are unrelated to their fundamental operations.
5. Restructuring expenses
It is the expense of reorganising a company’s activities to improve overall efficiency and long-term profit.
3. Capital expense
A capital expense (CAPEX) is the money spent by a company to maintain or update its fixed assets.
CAPEX refers to the cost of purchasing new machinery, cars, buildings, land, or any other significant asset for a business.
CAPEX includes the following:
● Buildings
● Computer hardware
● Equipment for the workplace
● Fixtures and furniture
● Land
● Machinery
● Vehicle
● Software
Fixed expenses, such as rent, are over which firms have limited control since they reflect a legal duty to pay.
Variable expenses are payments over which a company has complete control. This type of expense varies as a business chooses to reduce or raise its production or any other activity. Variable expenses include transaction fees and commissions.
What Small business expenses can I claim?
Many of the same expenditure claims are available to small businesses to larger organisations – as long as you can show HMRC that they are valid. Several small business expenses are specific to your sector. Following are some examples:
1. Staff costs
Salaries, bonuses, pensions, commissions, and other forms of compensation paid to full-time workers, independent contractors, consultants, and freelancers are all tax-deductible.
2. Travel costs
Costs, such as fuel, parking, and train or bus tickets, are tax-deductible. However, it is not possible to deduct travel to and from work.
3. Clothing expense
Money spent on business-related clothes, such as uniforms and safety equipment, can be claimed as a tax deduction.
4. Raw materials
Stock and raw materials, for example, are tax-deductible purchases.
5. Training courses
You can deduct the cost of training your staff or giving business-related courses as an expense.
6. Marketing and advertising
This includes website domain registration, hosting charges, pictures, brochures, flyers, and other forms of promotion and marketing.
7. Insurance
Financial expenses like insurance and bank fees are tax-deductible.
8. Food expense
Official client meals or employee lunches on business travel are 50% deductible.
9. Entertainment costs
HMRC permits you to claim £150 per employee per year for entertainment expenses, but if you’re a sole trader, you can’t claim anything.
Some expenses, on the other hand, are not tax-deductible.
Here are some examples of company expenses that you cannot claim:
10. Penalties
Failure to file taxes on time or pay bills by the due date might result in fines. Unfortunately, you can’t deduct these penalties.
11. Political contributions
You can’t deduct contributions to a political party if your company has made them in any way.
How to claim expenses UK
You must have an accurate and auditable record of an expense before you can claim it.
It confirms that these expenses were incurred within a specific time frame and are, therefore eligible to be claimed.
Next, calculate all of your allowable expenses for the tax year and enter the total on your Self-Assessment tax return (for a sole trader) or CT600 (for a company), which is how HMRC collects income tax.
You don’t have to give any proof to HMRC unless they specifically request it. That is why keeping accurate records while filing your tax taxes is essential.
When it comes to expenses, what do business owners often overlook?
Business owners neglect the primary thing: the small products they pay for out of their pocket with cash or a debit card, such as taxi fares, sandwiches or coffees while travelling, and even newspapers and other periodicals.
Because these are small charges, many business owners don’t bother claiming them via their companies. However, these tiny sums might add to a significant sum over time. As a result, business owners must declare all their legitimate business costs, no matter how minor they are.
Final thoughts
We hope you learnt about your firm’s essential expenses and how to manage them.
Keeping track of your expenses might help you save money in the short and long term. In the long run, you can put more money into your company and improve its financial health.