The simplification of expenses for small businesses is part of the government’s attempt to simplify taxation. Will you benefit from using the new simplified expenses?
The pros and cons of HMRC's new simplified expenses reporting system for small and micro businesses
The simplification of expenses for small businesses is part of the government's attempt to simplify taxation. Will you benefit from using the new simplified expenses?
One of the measures introduced in Finance Act 2013 last July, under the banner of 'simpler income tax for small businesses', is a set of fixed rate deductions.
From 2013/14 unincorporated businesses can choose to use any of the following three 'simplified expenses' when computing their business profits:
Expenditure on motor vehicles (ITTOIA
2005, s. 94D);
Use of home for business purposes (ITTOIA 2005, s. 94H); and
Premises used both as home and business premises (ITTOIA 2005, s. 94I).
These simplified expenses were introduced alongside the cash basis, but calculating expenses under these rules is optional for any unincorporated business whether or not they opt to use the cash basis (apart from partnerships, where any of the partners are not individuals, which are excluded from using them).
Expenditure on vehicles
If a business would be allowed to deduct expenditure in calculating the profits of its trade on a vehicle used for the purposes of the trade and not an excluded vehicle (see below) under the normal trading income rules or would be if it were not capital expenditure, the business can use the fixed rate allowance in respect of the qualifying expenditure.
An 'excluded vehicle' is a vehicle that is used for the purposes of the trade that is either:
a vehicle on which the person carrying on the trade has at any time claimed capital allowances; or
a motorcycle or goods vehicle on which any expenditure incurred acquiring the vehicle has been allowed as a deduction in calculating profits under the cash basis.
Once a fixed allowance for business mileage has been used for a particular vehicle this method of calculation must continue to be used for as long as the vehicle remains in the business.
Amount of deduction
The amount of the deduction is the 'appropriate mileage amount'. The 'appropriate mileage amount' is M × R where M is the number of miles of business journeys made by a person (other than as a passenger) using that vehicle in the period, and R is the rate applicable to that kind of vehicle. See figure 1 for the rates applicable per mile depending on the vehicle.If a business chooses not to use the simplified expenses mileage rates, the business can instead calculate motor expenses using actual expenditure and capital allowances. But if the business has elected to use the cash basis, capital allowances can only be used if the vehicle is a car.
Use of home for business purposes
A business can choose to make a flat rate deduction for use of home for business purposes, instead of claiming deductions on a just and reasonable apportionment of actual expenditure incurred.
The amount of the deduction is based on the amount of time spent working at home.
The applicable amount for a month, or part month, is shown in Figure 2. In this instance, the 'number of hours worked' means the number of hours spent wholly and exclusively on work done by the person, or any employee of the person, in the person's home, wholly and exclusively for the purposes of the trade.
If a person works different hours each month a different rate may apply for each month. The deductible amount for an accounting period is the sum of the applicable amounts for each month, or part of a month, in the period. In Revenue & Customs Brief 14/13, HMRC announced that the monthly flat rate includes all household running costs, such as heat, light, power, telephone and broadband/internet costs.
Premises used as a home and business
This simplified expense applies where premises are used as a home, but are mainly used as business premises, such as a guest house.
The amount of the deduction allowable for a period is the amount of the expenses less the non-business amount.
The non-business amount is based on the number of relevant occupants of the premises.
The non-business amount for an accounting period is the sum of the applicable amounts for each month, or part of a month, in the period given as per Figure 3.
A 'relevant occupant', in relation to a month (or part of a month), means an individual (including a child) who, at any time during that month (or that part of a month), occupies the premises as a home or stays at the premises otherwise than in the course of the trade.
On this basis it means that if a relative or friend comes to stay for a single night the non-business amount could increase for the relevant month by £150.
If a person chooses not to use the standard adjustment they can claim an allowable portion of actual expenses.
The flat rate amount includes all household goods and services, food, non-alcoholic drinks and utilities. It does not include mortgage interest, rent, council tax or rates so further calculations will be necessary to apportion these expenses between private and business use.
As a result of the introduction of this flat rate private use adjustment, HMRC has confirmed that it is withdrawing local agreements for private use of business premises ('board and lodging agreements'). These agreements are withdrawn with effect from 2013/14, however for 2013/14, any business that has used a local agreement for 2012/13, can also continue to use it for 2013/14.
Top tips
HMRC's Simplified Expenses Checker can be used to provide an estimate of the expenses that a person might be able to claim. The checker has deliberately been designed by HMRC to be simple, however this means that it does not necessarily give the full picture, so use it with care.
Given that when a person buys a new car they can choose to either claim capital allowances and deduct actual running costs, or alternatively they can use the appropriate mileage rates, comparative calculations will have to be prepared to decide which option will be most beneficial. However, whichever method is opted for must continue to be used for as long as the car is used in the business. As a result, the method chosen may not always be the most beneficial for every tax year.
For businesses opting to use these simplified expenses (and for any business currently using a board and lodging agreement) the changes will mean keeping different and in many cases more detailed records than was previously required. Given that the changes apply to 2013–14, some businesses would have needed to have amended their record keeping at least a year ago.
If you are an agent and have clients affected by these new simplified expenses rules you need to decide (if you have not already) how to deal with them. For example, will you be undertaking comparative calculations every year for each of the relevant expenses? If not, do your engagement letters need to make this clear?
Figure 1: Appropriate mileage amount rates
Kind of vehicle | Rate per mile |
Car or goods vehicle | 45p for the first 10,000 miles |
| 25p after that |
Motorcycle | 24p |
Figure 2: Use of home for business purposes
Number of hours worked per month | Applicable amount |
25 or more | £10 |
51 or more | £18 |
101 or more | £26 |
Figure 3: Premises used both as a home and business premises
Number of relevant occupants | Applicable amount |
1 | £350 |
2 | £500 |
3 or more | £650 |
How the system works in practice – HMRC case studies
Example 1: cars
You've driven 11,000 business miles over the year.
Calculation:
10,000 miles × 45p = £4500
1000 miles × 25p = £250
Total you can claim = £4750
You claim this instead of your actual vehicle costs.
Example 2: Business use of your home
You worked 40 hours from home for 10 months, but worked 60 hours during two particular months:
10 months × £10 = £100
2 months × £18 = £36
Total you can claim = £136
You claim this instead of the business proportion of your home expenses.
Example 3: Private use of business premises
You live at the premises
You and your partner run a B&B and live there the entire year. Your overall business premises expenses (eg, utilities, food, household goods, etc) are £15,000.
Calculation:
Flat rate: 12 months × £500 per month = £6000
You can claim:
£15,000–£6000 = £9000
Your child sometimes lives at the premises
You run a B&B and live there the entire year. Your child is at university for nine months a year but comes back to live at home for three months in the summer.
Calculation:
Flat rate: 9 months × £500 per month = £4500
Flat rate: 3 months × £650 per month = £1950
Total = £6450
You can claim:
£15,000–£6450 = £8550
Only sole traders or business partnerships can use simplified expenses. Limited companies or LLPs cannot use simplified expenses