🍦 Get your receipts in order

What's the taxman looking for from you?

Ben Nacca
November 09, 2023

Hey friend —

Have you been keeping your receipts?

The proper ones. The right ones?

If you’ve ever felt like you’re sitting on the naughty step because your receipts are all over the place then don’t worry - we’re going to clear this all up for you right now.

HMRC requires sole traders to keep their records for up to 5 years after the 31st January for the last tax return completed. A Limited Company needs to keep theirs for up to 6 years after the end of their most recently filed accounting period.

Thankfully, with tools like Xero and Dext, you no longer need to keep files and files stored in your office or attic for all the records physically anymore and while invoices and bank statements are quite self explanatory, when it comes to expenses it can be anything but.

Firstly, we have whether the expense can be claimed in the first place and whether it should even be kept. The general rule is if it is genuinely for the business then it’s normally allowable. The terms ‘wholly, exclusively and necessary’ are what HMRC use to deem business expenditure. Something may be used 100% within the business but if it’s not deemed exclusive to business use then it is usually disallowed as there is too much personal benefit perhaps as well.

Some common examples we see tend to be clothing that’s not protective or branded, cosmetic dental work and redoing the house for a home office (which can be partially claimed but not fully).

Generally, these things are hard to prove to HMRC they are only for business and that there’s no personal gain or motivation but it can be worth asking the question at least.

As with the receipts themselves for your allowable business expenditure, we then need to make sure we have the right ones. Just relying on the bank statement line is not enough and HMRC’s rule is that no receipt, no tax relief - be that income tax, corporation tax or VAT.

Usually, the Pareto Principle of 80:20 works here though. If you can get 80% of your receipts in, and those are mainly your bigger, larger costs then missing a couple of £10 receipts here and there are not going to cause any issues.

The main thing that makes a receipt claimable is that it needs to be a Sales Invoice or a VAT Invoice - it cannot be a;

card receipt
supplier statement
delivery note
purchase order
order confirmation email
screenshot of your bank statement on your mobile phone

What makes it claimable is having the date on the receipt, the amount and items purchased, as well as the VAT breakdown if you’re claiming the VAT back in a VAT return. It needs to have the supplier business name on it and most importantly, needs to be readable - i.e. faded or destroyed receipts that are no longer legible are also hard to put through.

As a side note, if you’ve lost the main receipt but you do have a card receipt, this can be used in some cases for general tax relief - it’s better than nothing but it won’t help to claim the VAT back. Ideally try to put the main invoice/receipt through.

Once you’ve got these, either keep them safe or if you’re using a digital solution like Dext Prepare then take a photo of the receipt and upload it - you can then safely bin the receipt as you now have a digital copy which HMRC do accept. For any receipts or invoices in your emails, using Dext you can just forward these to a unique email address that puts them safely in your account, saving you having to print them or take photos on your laptop screen.

As a final tip, the best method to stay on top of your receipts is to do so regularly or as you go - rather than waiting to the end of a quarter to upload all your receipts for your VAT return, try to get into the habit of uploading your expenses as they come in straight away, almost like filing them away digitally, or a the end of the day or the week perhaps.

Trying to find a receipt you had at the beginning of the month and wondering where you’ve misplaced it could cost you actual money in your business. For a £100+VAT receipt that’s eligible, you can claim the £20 VAT back on your next VAT Return and then between £19 and £25 of the £100 cost against your corporation tax bill. If you’re self employed, you could potentially claim back between £29 and £47 of that £100 as tax relief depending on whether you’re a basic rate, higher rate or additional rate tax payer.

Even at the minimum, that’s £39 (£20 + £19) you can claim back of that £120 receipt and if you’re misplacing a lot of your receipts, that adds up quick.

As a final note, HMRC can levy fines against a business or an individual for not keeping proper records so it could cost the business even more for improper recordkeeping.

If you have any questions about your record keeping please let me know. We’d be happy to help but I hope in the meantime this has cleared up the importance of keeping the right receipts and the actual cost implications of not doing so.

Question

Does the cycle2work scheme still exist and if so can that work for any company?

- Anonymous

Answer

Yes, so the Cycle2Work scheme is a government plan that makes it cost-effective to get cycling equipment and get tax relief and benefits with this. All part of promoting a healthier method of travel for yourself and the environment.

The Cycle2Work scheme is dependent on a PAYE scheme for payroll, not a business structure. This means a sole trader would be able to use this scheme, and not just Limited Companies. Most Limited Companies will have a PAYE scheme even just for the directors so that shouldn’t be an issue either.

As the employer, you will need to register with the scheme here and then you can use a participating retailer to then apply using your employer code. For instance, you can do this with Halfords, Bike2Work, etc. as an example and you can then choose your bike and accessories such as a helmet, lights, etc. The value used to be limited by £1,000 but now it’s set at the employer level meaning you can set whatever budget you would like.

In terms of how it works in principle, the company pays for the bike and then the cost of the equipment is deducted from your salary as a non-cash benefit each month. This saves you tax and national insurance as an individual via salary sacrifice. You save between 32% and 42% on income tax and national insurance depending on your tax band so there’s not too much of a saving to be had should you only be on a directors tax efficient salary other than being able to claim the bike cost through the business as an asset itself. It is ideal for your employees though if there’s demand as the tax savings with their normal salaries would be as above.

At the end of the agreement, you can return the bike back to the employer (as the employee), own the bike yourself at fair market value (or 25% of the value if the bike costs more than £500 after 12 months) or extend the hire agreement at no extra cost and no monthly payments or salary sacrifice. After 4-5 years, the bike ownership can be transferred automatically to the individual with no charges to pay.

There’s also no benefit in kind to pay and the employer themselves saves Employers NI as well.

As you can see, it does benefit those directors on higher salaries or general employees rather than tax efficient salaries - or if you’re a sole trader with a PAYE scheme for your employees as well - not a bad perk to offer if there’s demand for it in your business!

- Ben

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“The best preparation for tomorrow is doing your best today.”

H. Jackson Brown, Jr.

Written and edited by Ben Nacca