4. Receipts

Keep all receipts to do with your business. Get into the habit of asking for receipts whenever you buy things, from computers to biros. When you travel, keep your bus or train ticket in lieu of a receipt. If you work from home, hang on to household bills for gas, electricity and so on. Keep your phone bill, your mobile bill and credit card statements listing

business-related expenses like internet service provider subscriptions. Keep all receipts. Got that?

The reason is that these will all add up to reduce your net profit, and hence your tax bill. Or, look at it another way: every expense that you incur and which you cannot show a receipt for will be considered profit. And you will still be taxed on it.

File your receipts in date order and enter the details into your cash book. You can buy ruled books for this purpose if you want to keep handwritten records, but in this day and age you are more likely to use a computer spreadsheet such as Microsoft Excel. An example of how pages in your cash book might look are shown in Figures 1 and 2.

Unfortunately, you cannot claim all your business expenses against tax. And not all expenses are offset in the same way. Items which will last for a long period of time, such as computers, computer software and office furniture, are treated as capital expenses. Unlike the running costs of your business, for things like travel or stationery, these are spread out over several years. So, for example, you will not be able to offset the entire price of your shiny new computer against tax in the year you buy it (although, if you are registered for VAT you will be able to reclaim this entire element of the cost). At the time of writing, there is a tax concession called First Year Capital Allowances for small businesses which allows you to set off 50 per cent of the cost of IT equipment against your profits in the year of purchase. However, HMRC might withdraw or reduce this concession in the future.

The main items you can claim against tax are as follows.

• Staff costs, whether you employ people on a full-time basis or hire people to help you out once in a while. You can also pay your partner if they help out with your business, for example with book keeping. If your partner does not have other employment, this can be a handy way of cutting your tax bill as you can use up their basic tax allowance (the amount of money each person is entitled to earn free of tax).
• Premises costs, such as electricity, gas, rent or mortgage interest and telephone rental. If you work from home, the taxman will expect you to claim a proportion of your annual premises costs that reflects the amount your home is used for business. So, for example, if you have five rooms in your home (including any room where you could fit a desk, such as kitchens, living rooms and bedrooms, but excluding bathrooms), and work entirely from home, you would be justified in claiming up to a fifth of your household bills against tax. Commonly, a set weekly amount is used for calculating a ‘use of home as office’ charge.
• You can also claim back repairs to your office space, even if it is just a room in your house. Be aware, though, this does not mean you can offset the cost of redecorating your entire home. As with other household expenses, the taxman will allow only a proportion of costs that can be attributed directly to your workplace. Note, also, that repairs are not the same as improvements. The latter, according to the HMRC, will increase the value of your workspace and, if you own it, will mean you could be liable for capital gains tax on a proportion of the profits if and when you sell it.
• General administrative expenses incurred in the day-to-day running of your business. These will include phone bills; postage, photocopying and stationery; couriers, if you use them; the cost of magazines, newspapers and other reference materials; subscriptions to publications and services like internet access; insurance costs; equipment repairs and leasing; and anything else you buy for your office.

• Car expenses, such as petrol, motor insurance, membership of motoring organisations, or hire charges, can also be allowed, although the taxman will presume that there will be some personal mileage. If you use your car for work a lot, keep a record of business mileage and work out, realistically, what proportion of the total mileage this represents. Use this percentage to calculate the business element of your car expenses. If you are VAT registered and you reclaim all the input VAT on all your petrol expenses you will be liable to pay a set quarterly petrol scale charge to HMRC, to cover any private mileage. Alternatively, you could use HMRC’s set business mileage rates of 40p per mile for the first 10,000 miles and 25p per mile thereafter.
• All travel costs, including bus, train, taxi and plane fares and overnight stays in hotels or guesthouses, as long as they are directly related to business. Similarly, if you travel around the country or abroad and the trip involves an element of work, you can claim expenses that reflect that element. You can also claim meals as long as they are necessarily a part of work-related travel. One criterion I have heard of to judge this is that they have to be incurred outside of a five mile radius from your normal place of work.
• Promotional costs incurred in advertising your business. This can include the cost of setting up a website, for example. Unfortunately, however, one of the major expenses you are likely to come across in promoting your business – the cost of networking, lunching with or entertaining clients and contacts – cannot be claimed against tax. Also, no input VAT can be reclaimed on entertaining.
• Professional costs, including accountants’ fees (your accountant will probably be quick to point out that their payment is tax-deductible) and those of lawyers, if you use them.
• Finance expenses, such as charges and interest on business bank accounts, credit cards, hire purchase or loans, but not capital repayments.
• Your pension payments. You would not normally include these in your cash book, but they should be entered on your tax return. Whatever you do, it is important you set some money aside for your pension if you intend to stay in business for any length of time, as no one else will. A stakeholder pension is likely to be the best option because it is cheap to run and simple to set up. For more advice, speak to your independent financial adviser, if you have one. You can also get information from financial websites like The Motley Fool (www.fool.co.uk).