Entertaining people can be a very enjoyable part of being in business - as sharing time, food and drink away from the office can help to build and cement working relationships. But when can you claim tax relief on the cost of entertaining someone, and what about VAT?

Here are a few important things to bear in mind when it comes to tax and VAT on entertaining costs. Please note, in this article the guidance on when VAT can be reclaimed relates only to businesses that are registered for VAT. If your business is not registered for VAT it cannot reclaim any VAT at all, apart from in certain circumstances when it subsequently registers.

1. Who are your employees?

HMRC only allow tax relief and the claiming of VAT on the cost of entertaining your business’s employees. And they’re very strict about who counts as “an employee”. Former and previous employees don’t qualify, nor do subcontractors, nor do shareholders who don’t work in the business. From experience, “an employee” has to be someone who is on your business’s payroll and being paid a salary.

If you’re entertaining anyone else, that counts as “business entertaining” rather than staff entertaining, and you can’t claim either tax relief or VAT on the cost of entertaining them.

For what happens when a business has salaried directors, but no employees, please see section 5 below.

If you’re a sole trader, or a partner in a partnership or LLP, remember that you don’t count as an employee because legally there’s no difference between you and the business, and therefore, you can’t claim tax relief or VAT on the cost of entertaining yourself.

2. What is entertaining?

HMRC say that “entertaining” is providing free or subsidised hospitality. Here are examples they give of what can count as “entertaining” - this list is not exhaustive:

• food and drink
• accommodation - eg hotels
• theatre and concert tickets
• sporting events and facilities
• entry to clubs and nightclubs
• use of capital assets such as yachts and aircraft
• payments made to third party business entertainment organisers
• free samples
• business gifts
• when you provide entertainment or hospitality only for the directors or partners of your business 

We’ll look at the last point in more detail in section 5 below.

3. Entertaining employees: Benefit

When you’re entertaining your employees, this may be allowable for tax relief in your business’s accounts, but it could also be a benefit on which your employees have to pay some tax.

If you’re hosting an annual event, such as a summer boat trip or Christmas party, that’s open to all staff and costs less than £150 per guest present, then this is what HMRC call a “qualifying event” and will not be a taxable benefit for your staff.

But if any of these three conditions aren’t met, then the whole cost of the event becomes a taxable benefit - for example if it’s a one-off meal to celebrate a new contract, or if some employees are excluded, or if the cost per head is over £150.

4. Entertaining employees: VAT

The cost of entertaining employees as a reward for good work, or to keep up morale, is staff entertaining, which is allowable for tax relief and on which you can reclaim any VAT you pay.

But if your employees are acting as hosts to a group of customers at an event, then that then counts as business entertaining and there’s no tax relief or VAT deduction available on any of the cost of the event.

For tax relief and VAT reclaim to be allowed, the purpose of the event has to be to entertain employees.

If there’s an event with a mixed group and the purpose of the event is to entertain everyone equally, then you can claim back the VAT on the cost of entertaining your employees only. For example, if you have a staff Christmas party and allow your employees to bring a friend, you’d have to work out the amount of VAT you paid on the cost of entertaining your employees and only claim that. You can’t claim the VAT on the cost of entertaining their friends.

5. When your business has no employees other than directors

If your business has one or more directors, but no other employees, then the issue becomes more difficult.

HMRC say that the cost of providing entertainment only to directors or partners doesn’t qualify for tax relief or a VAT deduction.

But they also say that if the directors or partners are travelling “away from their normal place of work on a business trip”, then any VAT suffered on the cost of travel, accommodation and meals can be reclaimed. The rules for tax relief would mirror this, and this also applies to employees, sole traders, partners, and to subcontractors who are part of the team and treated like employees.

So if you want to have a celebration meal for two directors who are the only employees of the business, make sure that the meal takes place away from the usual place of work and as part of a business trip which the directors would have made anyway, for example to see a client!

This is a grey area so if you are not sure whether you can claim tax relief or reclaim VAT on a particular cost, you should seek professional advice from an accountant who will be able to advise you.

Expenses month series:

• Working from home expenses
• Travel and accommodation expenses
• Entertaining expenses

What makes you feel satisfied with your work? Hit us up on twitter or leave a comment and let us know. And have a great weekend!

Our Chief Accountant Emily has been hard at work and has created this handy infographic for UK limited companies and sole traders, which explains whether or not they can claim for their lunch when they're out on business. Judging by the questions we've received during our recent live expenses Q&A sessions, it's an issue that many people find confusing - so we hope that this guide will provide a little bit of clarity!

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<p> <a href="http://www.freeagent.com/l/food-and-drink-expenses-travel"> <img src="http://freeagent-assets.s3.amazonaws.com/website/images/site-assets/landing/lunch.600.png"> </a> </p> <p style="align: center; font-family: helvetica, arial;" > View the full image at <a href="http://www.freeagent.com/l/food-and-drink-expenses-travel&utm_campaign=expenses&utm_medium=infographic&utm_term=food-and-drink">FreeAgent</a> </p> ]]> Thu, 16 May 2013 16:44:28 +0100 http://www.freeagent.com/central/lunch-on-the-go-infographic FreeAgent Central http://www.freeagent.com/central/lord-young-report Lord Young, enterprise adviser to the government, has recently published the second phase of his report into small business. This time he looks at Growing Your Business.

In summary, he’s recommending increased support to help small businesses grow:

• A “Supporting Small Business Charter” to encourage business schools to target the area of SME growth.
• A £30 million “Growth Vouchers” programme, aimed at helping small and micro businesses to get professional help.
• An increased £30 million funding for the Start-Up Loans scheme, with a recommendation that the current upper age limit of 30 on this scheme be removed.
• More funding for SMEs in their third year looking for money to grow, and an extra £100 million funding to be made available through the Business Finance Partnership, which promotes alternative finance sources such as crowdfunding.

I’d like to pick up on three points in the report.

1. Growth through simplification?

Lord Young points out, “Within the micro business population itself growth has been driven predominantly by businesses without employees.”

Drawing attention to the perceived complexity of the recruitment process - and to the fear many business owners have of recruiting the “wrong” employee, costing them and their business a lot of time and money - he says: “The actual employment process should be simplified. We need to ensure that employers can complete the actions required of them more seamlessly.”

He’s absolutely right. To me, the key to business growth is simplification of the myriad legislative processes involved. Employment, HR, tax, all are hopelessly complicated, and contribute to why many businesses choose to stay small - so making these simpler would be a great boost to the small business sector.

However, I would also hope that these changes are not rushed and that all of the implications are properly considered - to ensure that by simplifying one aspect of running a small business they don’t inadvertently make things more difficult elsewhere!

2. Growth Vouchers: what will the model be?

The report makes a proposal for a £30 million Growth Voucher scheme, but also mentions that the model for this has not been finalised. So it's not yet clear if these vouchers would actually allow small business owners to redeem their value on professional services such as accounting (which is an idea that our good friend Elaine Clark at Cheap Accounting talks about on her blog).

I wholeheartedly agree that small business owners should be encouraged to seek professional help and guidance, given the complexity of the legal framework in which they are operating. A voucher scheme would help with this, however, the quality of the providers would need to be vetted.

I am also concerned that Lord Young wants private firms to set up websites providing “advice and inspiration to help people start and develop their businesses.” My concern here is that this could lead to an enormous and disjointed collection of websites, with business owners confused as to which one to choose. I would have preferred a centrally managed and operated service with funded advice from vetted professionals. 

3. Start-Up Loans: no age limit is positive

I agree with Lord Young’s recommendation that the Start-Up Loans scheme should be open to anyone of any age who wishes to start a business. Many people over the current age limit of 30 have ambitions to start a business but do not have the money to spare. They may have better-paid jobs than their younger counterparts but are also more likely to have mortgages to pay and children to support, so they cannot simply walk away from a well-paid job

Opening the Start-Up Loans initiative to potential business owners of any age would be a very positive move.

From my perspective, Lord Young’s report has a lot to commend it and I hope that the government will heed his recommendations and act upon them.

]]> Tue, 14 May 2013 14:49:07 +0100 http://www.freeagent.com/central/lord-young-report FreeAgent Central http://www.freeagent.com/central/travel-and-accommodation-expenses It’s Expenses Month here at FreeAgent, and we’ll be posting lots of useful information about managing and claiming your expenses throughout the rest of May. In the second article of her expenses series, our Chief Accountant Emily talks you through claiming the costs of travel and accommodation for your business. 

Are you self-employed and have to regularly travel for your business? And does this travelling ever involve an overnight stay away from your home?

If the answer is yes, then there's good news - you may be able to claim some of these costs back. Here's a few tips for working out which travel and accommodation costs you can include in your business’s accounts. 

1. Reason for the journey

Before you can claim for travel or accommodation, you need to consider why you made the journey in the first place. Was it just for business, such as to visit a client, or to pick up your new business cards?

Or was there a private element to your travel? For example, did you stop on your way home from a client meeting to do your weekly shop or another non-work-related chore?

Before you can work out if you can claim for your travel, you need to establish what the primary purpose of the journey was. If it was mixed (i.e. for both business and private), then you need to look at whether you can split the business element from the private part of the journey.

Let’s look at some examples.

Business journey: incidental private use

If your journey was primarily for business, and any private use of the journey was incidental, you can put the full cost of this travel into your business accounts.

Simon is a web designer. He travels by train from his home in Birmingham to visit a client in Brighton. While he is there, he has a walk by the sea.

The purpose of Simon’s journey to Brighton was for business. The private element, his walk by the sea, was purely incidental. Simon therefore claims the full cost of his train ticket in his accounts.

Mixed journey: different uses separable

If your journey included both business and private elements, but you can split out the private element, then you would include only the business cost in your accounts.

Jessica is a business consultant. She lives in Glasgow but has several clients who are based in Manchester. She travels to Manchester and stays there for two nights in order to attend meetings with her clients. She then decides to extend her stay to three nights so that she can attend a Premiership football match. Doing this costs her one night’s extra hotel bill and £50 in fees to change her train ticket.

The purpose of Jessica’s journey was to visit clients. She can claim the full cost of her train ticket but she cannot claim the £50 in fees to change the ticket, because she only had to do that in order to see the show, which is not a business expense.

She can also only claim two nights’ worth of hotel accommodation, not three, because the third night’s stay was for a personal purpose.

Mixed journey: no separation possible

If your journey is for mixed purposes, and you can’t split out the business and personal elements, then you can’t claim any of the cost of that journey.

Tom runs a microbrewery. He travels to his local town to bank his business takings and to do the weekly supermarket shop for his family. Because that journey was for mixed purposes, and because he can’t split the cost into business and private, Tom must not include any costs for this journey in her business’s accounts.

2. Use of your own car

When you’re self-employed you will often travel in your own car on business.

The simpler way to do this is to include your business mileage in your accounts, at HM Revenue’s approved rates. If you’ve already been doing this for some years, you must continue to use this method until you change your car. If your business is new, then as from 6th April 2013 you can use this method if your annual sales are under the current VAT limit, which is £79,000 at the moment.

Otherwise you’ll need to work out your car running costs and claim a percentage of them in your accounts, based on how much you used your car for business and how much was private. This means you have to track the mileage you travelled for all your journeys, so that you can work out the business use percentage of your car.

This second method will take longer but may save you tax if you have a car that’s comparatively expensive to run.

3. Method of transport

HM Revenue don’t require you to use the cheapest available method of transport – or even to claim only the amount that the cheapest method would have cost you. You can claim the full amount you spent on the journey.

Let’s take an example.

Elizabeth is a self-employed PR consultant working in London. She travels to Edinburgh to visit a client.

To make this journey by overnight coach would cost her £35, to go by train would be £90 standard class or £160 first class, and to fly would cost her £80.

Elizabeth decides to save time and fly.

She can claim the full £80. She’s not restricted to claiming only £35 because there would have been a cheaper way she could have reached Edinburgh.

The main issue with travel and accommodation is to make sure you’re certain that the only costs you’re including in your accounts are for business travel.  And remember - if you are in any doubt about what you can and can’t claim, you should seek professional advice from an accountant who will be able to advise you.

Expenses month series:

• Working from home expenses
• Travel and accommodation expenses
• Entertaining expenses

]]> Mon, 13 May 2013 17:01:30 +0100 http://www.freeagent.com/central/travel-and-accommodation-expenses FreeAgent Central http://www.freeagent.com/central/freeagent-friday-flow-edition After last week’s motivation edition, are you ready to get on with some great work? This week, we’re looking at how you can harness your personal “state of flow” - the state of 100% focus on the task you’re currently doing - and use it to improve your performance while you work.

Understand your flow

Psychologists refer to “flow” as the state of mind achieved when you’re completely immersed in a specific activity. Think of it as the ultra-focused mental nirvana that a top athlete strives to achieve before their big event, where all of their mental and physical skills are working in harmony. This description on About.com is a great resource for understanding the theory of flow and what it feels like to achieve it.

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Be in the moment

Want to achieve flow? Then you may have to start trying to live in the moment rather than worrying about the future. This article from Psychology Today explains how your natural performance can greatly improve when you’re not thinking about it - and suggests that savouring the moment and enjoying the task in hand is the best step towards entering your flow state.

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Eliminate distractions

People achieving their flow state often feel like time passes quicker than usual - as their focussed minds are occupied and are ignoring external distractions. So keep an eye out for those little things that can put you off your game like those Twitter alerts on your phone or that pop-up email notification, and use some creative ways to cut them out of your routine.

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Stick to what you know

When you try something new, it’s impossible to achieve flow. You need your subconscious brain to take over when you’re in the zone, and it gets suppressed when you’re doing something that is unfamiliar. So don’t worry if you’re not feeling in the zone with everything that you do, but still aim to achieve it for those tasks that you know inside out.

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As well as the links above, we’ve also added “Flow” and “Finding Flow” to our Great Business Books Pinterest board. Do you have a great method for getting into the zone? Hit us up on twitter or leave a comment and let us know. And have a great weekend!

]]> Fri, 10 May 2013 14:35:26 +0100 http://www.freeagent.com/central/freeagent-friday-flow-edition FreeAgent Central http://www.freeagent.com/central/national-enterprise-network-partnership Starting a business is a daunting prospect. Without the right knowledge or support, it can be very difficult to establish yourself in your chosen market - and when you’re busting a gut trying to make your new business a success, you don’t need the unwelcome distraction of managing your books to think about.

Thankfully, there are also a lot of local enterprise and not-for-profit agencies across the country that provide vital services for start-up businesses. So if you’re starting out for yourself, you can take advantage of some of the incredibly useful services that these organisations provide, including face-to-face business advice, networking groups, incubator workspace hire, training and mentoring.

Here at FreeAgent, we’re now partnering with one of the biggest UK names in this sector - the National Enterprise Network (NEN) - who are the umbrella organisation that supports these agencies throughout the UK. Basically, if there’s a local business incubator or advice service in your area, the chances are that it’s overseen and supported by the NEN; so it’s a really important organisation for small business owners to know about. Take a peek at their website and, in particular, browse through the member database on their homepage to find out what support is available in your area - it’s really useful stuff to know if you’re starting a business.

You might also like to follow their twitter page to find out more about the work that they do. We can’t wait to get started!

]]> Thu, 09 May 2013 16:12:28 +0100 http://www.freeagent.com/central/national-enterprise-network-partnership FreeAgent Central http://www.freeagent.com/central/business-use-of-home-expenses It’s Expenses Month here at FreeAgent, and we’ll be posting lots of useful information about managing and claiming your expenses throughout the month. To kick off our series, our Chief Accountant Emily talks you through claiming the costs of working from home.

Are you one of the many self-employed people in the UK that carries out work from their own home?

If the answer’s yes, then there’s good news for you: you’re entitled to include part of the running costs of your home in your accounts, which will save you some tax. Hurray! Now - how do you work out how much you can claim? 

Two potential methods for calculating business use of home

If your business is eligible to use the new simplified accounting method, then as from 6th April 2013 you have two options to work out how much to claim for business use of home.

If your sales are under the VAT threshold, which at the moment is £79,000 a year, and you are a sole trader or in a partnership where all the partners are individuals rather than corporate bodies (so if you are in a partnership and one of the other partners is a limited company, that’s not you), you’re eligible to use the simplified accounting method, and one option this method allows is a flat rate calculation for business use of home.

The flat rate method

This simply asks you to look at how many hours a month you spend running your business at home, on average, and then include a fixed amount in your accounts for business use of home.

The amount varies with the number of hours per month you work at home, as follows:

25-50 hours: £10 per month

51-100 hours: £18 per month

101 hours or more: £26 per month

Using this method will certainly be quicker than working out your actual costs, but the figure might not be as high and so you could save time but pay more tax.

The second method, which is the method you’ll have to use if your business is not eligible to use the simplified accounting method and which is also the method that has to be used for accounts dated up to and including 5th April 2013, works like this. 

Analysing the costs method

If you want to claim part of the actual running costs of your home in your business accounts, then how much you can claim depends on the type of business you have and what work you actually do at home.

For example, if you’re a freelance decorator you might spend an hour or two a week writing up your books at home, but spend the rest of your working life at your customers’ properties. But if you’re a self-employed PR consultant or web designer, you may well do the vast majority of your work at home and only occasionally visit clients.

HMRC say that you need to apportion the running costs of your home on a “fair and reasonable” basis between the private element of that cost - the part that relates to you actually living there - and the business element. But how do you do this?

One method is to work out how many rooms you have in your home, and identify how many of those rooms you use for business - and also calculate how much time you actually use these rooms for business.

Just remember that it’s not a good idea to use any part of your home solely for business activities all the time and never use it for any private activities, because capital gains tax will then be due on the part you use just for business if, and when, you sell your home. Instead, try to make sure that your work space serves a dual purpose - for example, my own office at home is also my music room, and I could easily prove that to a visiting HM Revenue inspector because there’s a piano in there.

So, say there are 10 rooms in my home. I only use one for business, and 90% of the use of that room is for business. So I would add up all the costs I can claim, and multiply that by 1/10 and then by 90%, to get my accounts figure for the business use of my home.

But what running costs in my home can I actually include in my accounts?

Costs you can claim

Here are some of the costs you might incur to run a home, which you may then be able to claim part of in your business accounts: 

Mortgage

If you’re buying your home through a mortgage, you can claim a proportion of the interest only - not the capital repayment. 

Rent

You can’t charge your business rent when you’re self-employed, because legally you are the business. But if you’re renting your home from a landlord, then you can claim a proportion of the rent for your business.

Council tax

You can claim a proportion of your council tax cost. However, depending on how much you use your home for business, you may have to pay business rates rather than council tax. 

Light and heat

You can claim the business proportion of your gas and electricity costs for lighting and heating in the room(s) you use for business.

Telephone and broadband

Remember that what you can claim for your telephone and broadband is not apportioned on the basis of the number of rooms in your home, but on what your actual usage of the line is.

You can claim the full cost of all your business use of the line, and a percentage of the line rental, based on how much you use it for business purposes and how much is for personal use. 

Property repairs

If a property repair relates solely to the part that’s used for business, you would include this cost in your accounts in full, subject to the business use of that room.

So for example, if the ceiling in my office/music room was repaired and that cost £200, I wouldn’t need to divide that by 10 because the repair was only for that room – I would just multiply by 90%, and include £180 in my accounts.

If the repair is to the whole house, for example a repair to the roof, you can include that in the same proportion as you would the rent or council tax – so in the example of my 10-room house, the repair cost x 1/10 x 90%.

But if the repair is just for a part of the house that’s not used for business - such as replastering of a kitchen - then you can’t claim any part of that repair in your business accounts.

Water

If you use a lot of your home water supply for business - for example if you run a car valeting service - then you would need to apply to the water company for this to be separately charged, and you could claim the full cost.

But if your water use for your work is only minor, you can’t claim any of the cost for your business.

 

Claiming costs of working at home is not as simple as it initially sounds. If you’re in any doubt as to what you can claim, you should seek further advice from an accountant.

Expenses month series:

• Working from home expenses
• Travel and accommodation expenses
• Entertaining expenses

]]> Tue, 07 May 2013 17:09:42 +0100 http://www.freeagent.com/central/business-use-of-home-expenses FreeAgent Central http://www.freeagent.com/central/its-a-trap-five-tips-from-star-wars-for-avoiding-business-mistakes Today is Star Wars Day - so May the Fourth be with you! Before we bust out our dusty VHS copies of original trilogy (no prequels or special editions here!) for a marathon screening, we thought we’d share a few of our favourite business tips that you can learn from the Star Wars saga.

1. A good mentor can make a big difference

Luke’s progression from whiny farmboy to fully-fledged Jedi would have been impossible without good mentoring. He’s eased into the ways of the Force by two mentors: Obi-Wan, who nurtures his raw talent and provides some sage advice, and Yoda, who encourages him to reach his full potential. Sure, it’s possible to do everything on your own, but never discount the value of someone who has been there and done it before. Check out these tips from the Guardian about mentoring for small businesses.

2. Reward loyalty

Many people feel that R2D2, the steadfast droid who loyally held Luke’s battered X-wing together and trekked through the desert to save him is the real hero of Star Wars. Look for unsung heroes and remember your customers and staff aren’t droids - rewarding their loyalty could encourage them to be even bigger advocates for your business in the long-run.

3. Shoot first (like Han)

Special editions be damned - it was Han that shot first in the Mos Eisley cantina. Going with pure gut instinct, his quick thinking in the face of danger helped to diffuse a potentially problematic situation and enable him to continue with the mission in hand. Of course you should always make sure you think through all of the options carefully before ploughing ahead, but sometimes trusting your gut is the right way to go. Otherwise someone else might shoot first and you’ll be left looking - metaphorically at least - like Greedo.

4. Identify your Achilles heel

The Empire’s overconfidence in its technology and firepower was its ultimate downfall - as they completely failed to identify their own weaknesses. If only the engineers on the Death Star had done a SWOT analysis, they’d have identified the danger of having an exposed exhaust port linking directly to the main reactor. Checking in with your own SWOT analysis every few months can help you avoid any nasty surprises.

5. Don’t underestimate your competitors

Overconfident to the end, the empire massively underestimated the Rebel threat. Moff Tarkin keeps dismissing the incoming X-wing fighters right up to the point his space station blows up around him. Don’t ever dismiss your competition out of hand - conduct regular competitor reviews and find out what you can learn from their activity to make sure you aren’t caught out.

We hope that’s helpful. We’re going to go and fire up the VCR now. See you in six hours.

Photo credit: jdhancock

]]> Fri, 03 May 2013 17:47:05 +0100 http://www.freeagent.com/central/its-a-trap-five-tips-from-star-wars-for-avoiding-business-mistakes FreeAgent Central http://www.freeagent.com/central/freeagent-friday-motivation-edition This Friday, how motivated do you feel about finishing things off before the weekend? Could you do with a little boost? This week we’re looking at the best ways to maximise your motivation, and some surprising things about what really motivates you to succeed.

Don’t rely on rewards for every kind of task

It’s common to reward yourself for completing important tasks - but could this be detrimental to your motivation? Research suggests that although rewards can help you complete simple or straightforward tasks, they may actually reduce productivity when it comes to more conceptual work that requires creative thinking. Check out this presentation by business author Dan Pink to see how encouraging a sense of purpose or mastery could be more beneficial for keeping you motivated.

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Be positive...

Are you driven by achieving more, or by trying to avoid failure? According to this article from Psychology Today, shifting away from avoiding failure and adopting a more achievement-focused mentality often breeds a higher level of motivation - and ultimately success - for people in business. It may be a cliche, but it sounds like thinking positively really could make a difference.

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...But pick the right time to be negative

Not all motivation is down to being positive, however. Sometimes it can be beneficial to start from a more negative position and see things develop. We really like the McDonald’s Theory, where recommending that you do something bad helps to motivate you to come up with better suggestions.

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More surprising things about motivation

In this article from TED, you’ll learn how we’re not only more motivated to do a task if we know that it will help others, but how browsing for cute cat pictures on the internet can also help. Also, check out these charts from Business Insider to find out how everything from how much you trust your co-workers to the ambient temperature of your office can affect your motivation.

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Do you have a great tip for staying motivated? Or do you think there’s an awesome motivation method that we’ve missed? Leave a comment or hit us up on twitter to let us know. Have a great weekend!

]]> Fri, 03 May 2013 14:47:25 +0100 http://www.freeagent.com/central/freeagent-friday-motivation-edition FreeAgent Central