If it’s a business, it’s got expenses.
Business expenses are costs collected in the ordinary course of business, a.k.a all that stuff you need to buy to do your job. They can apply to small entities or large corporations. And being savvy with your expenses is a large part of running a successful business, regardless of its size.
And let's face it, no one wants to miss an opportunity to save some money!
Here is an overview of the types of expenses that businesses can have, what is a business expense and what is not, where the definition of what qualifies as a business expense comes from, as well as some tips for keeping track of it all.
Let’s get started.
The best way to identify a business expense is to think about what your business uses. Here’s a some examples of the most common business expenses (please be advised this is not an extensive list):
Physical items like paper, desks, printer supplies
Software subscriptions, IT equipment
IT support, cleaning, accounting and legal fees, outsourced office functions
Power, water, rent
Petrol, transport fees
Meals and Drinks
Snacks for the office, team dinners
Whilst you can’t reduce your tax bill or claim VAT back, it is a business expense for many companies.
Business expenses can be further broken down into three main costs types:
A fixed cost is one that does not change, or changes only slightly. Things like the monthly rent for an office space.
Variable costs, or expenses, vary from month to month and are typically a company’s largest expense. An example of a variable cost would be the payment for a large amount of freelance personnel, or overtime.
Periodic expenses are ones that happen infrequently. These can be hard to plan for, such as your printer totally crashing and having to purchase a new one.
It’s probably no surprise, but personal expenses cannot be deemed as a business expense.
The only exception is if the expense is used both for personal and business use. Then of course the business part can be deducted.
Here’s an example:
Daniel runs his own gardening business. He uses his truck 50% of the time to visit clients, and the other 50% is used for family or pleasure. The rules allow the client visits to be considered a business expense, but in order to do this he needs to keep track of mileage and the purpose of each and every car ride.
In the UK, the HMRC sets the rules for business expenses. It makes it quite clear that for a purchase or cost to be considered a business expense it must be necessary and that is wholly and exclusively incurred as part of the day to day running of your business. Here’s the full list of HMRC approved business expenses .
As mentioned earlier, it’s important to keep track of all your business expenses and ensure that you are marking them correctly. Many companies have found themselves under the scrutiny of HMRC because they include personal expenses in their expense reporting – probably don’t need to go into detail about why that is something to avoid....
But it brings up the question: how can I make sure that I am keeping track of my expenses in order to maximise the tax benefits?
A large chunk of your business expenses will be tax deductible.
This means that these expenses will be deducted from your profits, and in turn, reduce your tax bill.
Unfortunately, many companies fall into the trap of storing up receipts and invoices to deal with at the end of each month, or even later. This makes claiming tax back a burdensome task, and means that the end of year accounts and tax bill can come as a bit of a shock.
By recording your expenses and having good expense management, it ensures that you have a true view of your financial position throughout the year. And this is easily achievable with a smart company card solution, like Pleo.
After every purchase using a Pleo card, the spender is prompted to add the receipt and/or invoice right away. No lost receipts, no paperwork, and most importantly, no more end of the month (or year) surprises.
Pleo has categories, subcategories, tags and notes that can add real clarity to all of your expenses. Read here for the complete low-down on why Pleo categories matter.
Categories help your bookkeepers automatically apply nominal codes and tax rates to expenses when they’re exported.
Since a Pleo card is a Mastercard, there are nine categories that Mastercard assigns to purchases that cover every possible business expense - Entertainment, Equipment & hardware, Marketing & Advertisement, Meals & dinners, Office expenses, Phone & internet, Software, Travel and Other.
Pleo admins can set up subcategories to further properly sort expenses.
For instance, a dinner was purchased on a Pleo card so the category of Meals & drinks was automatically applied. But was the dinner a team get-together? Was it purchased while traveling on a business trip? Or was it for client entertainment?
Admins and bookkeepers can also set up tags. These can be implemented from Xero or e-conomic, and of course, can be set up directly in Pleo.
Tags make it possible to trace all kinds of financial dimensions of a business expense.
Relaying back to the dinner, if the subcategory applied was client entertainment, a tag can provide information about which particular client the purchase is related to.
Employees should be encouraged to add notes to a purchase when further information is required despite a category, subcategory and tag being applied.
An example of this could be adding which connections and other employees where a part of the client dinner.
And all of these categorised and organised purchases are recorded in one place. A complete overview of company spending and your business expenses, right in Pleo.
Making you ready for tax season.
See how Pleo can keep track of your business expenses. Book a demo today.