Non deductible business expenses

Generally, business expenses incurred necessarily and exclusively for business are allowed for tax purposes. However, there are some non-deductible business expenses when come to calculating your tax liability.

For example, where the expenses incurred relates to both business and private use, the personal use portion is not tax deductible for your company. At the same time, you must add it back to your business accounting profit when calculating your tax liability.

Motor expenses

Likewise, a motor car is used for both business and private purposes. The capital allowances and the total car running expenses will be split in proportion to the business and private mileage. For this purpose, you will need to keep records of your total mileage and the number of miles travelled on your business. In order to calculate the correct amount of motor car expenses for your business.

Entertaining customers are non deductible business expenses

Usually, entertaining expenses are not tax deductible. However, staff entertaining expenses and gifts to employees are deductible but there are restrictions. Seek accountant advice on this.

Bribes, kickbacks. fines, penalties and lobbying costs.

These expenses are self explanatory of why they are not tax deductible.

For example, Companies House statutory filing fees for filing your confirmation statement is deductible. However, the late filing penalty for delivering your company accounts late is not a deductible expense for tax purposes.

Start-up costs

On one hand, If you have just started your business, you may be wise to consult a tax accountant advice especially if your start-up costs are rather large.

Working from home

On the other hands, If you are working from home, you will need to keep sufficient records. For example, to back up the proportion of heating and lighting costs that relate to your business and your private use.

Life insurance premiums

A business may buy life insurance coverage on key officers and executives. However, if your business is the beneficiary, the premiums are not deductible. Consequently, the proceeds from a life insurance policy are not taxable income to your business in the event of death. Because the cost of the premiums was not deductible. In short, premiums are not deductible, and proceeds upon death are excluded from income tax.

Travel and convention attendance expenses

Occasionally, some businesses pay for rather lavish conventions for their managers. Sometimes, spend rather freely for special meetings at attractive locations that their customers attend for free. The UK tax office takes a dim view of such extravagant expenditures. They may not allow a full deduction for these types of expenses. The HM Revenue and Customs (HMRC) holds that such conventions and meetings could have been just as effective for a much more reasonable cost. In short, a business may not get a full deduction for its travel and convention expenses if the HMRC audits these expenses.

Transactions with related parties

The HMRC takes a special interest in transactions where two parties are related in some way. For example, a business may rent space in a building owned by the same people who have money invested in the business. Thus, the rent may be artificially high or low in an attempt to shift income and expenses between the two tax companies or individuals. In other words, the transactions may not be at arm’s length basis. For this reason, a business that deals with a related party must show that the price paid or received is at current market value.

Lastly, seek advice from tax accountants if you have incurred business expenses that you are not sure whether they can be claimed against your business profit fully or partially.

Cash handling

Business to have a cash handling policy for efficient cash management and to prevent fraud.

It is a good idea for your business to draw up internal control procedures for your staff who handle your business cash and monies matters in your business premises.

Generally, the cash handling procedures shall consider covering the following.

Bank Deposits

Firstly, when paying a cheque or cash into a bank account, a deposit or paying in slip must be completed. Deposits can be made in person, by mail, or an automated teller machine (ATM). Cash should not be made by mail.

Receipts From Customers

Secondly, you must update Cashbook, individual customer’s ledgers and trade debtors control accounts to keep track of your customers’ outstanding balances.

At the same time, send reminders to follow up on outstanding sales invoices. Document the payment methods your customers used to settle their invoices. For example, cash or cheque or by bank transfer or combination of the three.

For high volume transactions business, it is advisable to maintain your accounting records using well-known bookkeeping software like Clearbooks, Xero, Sage or Quickbooks. As this will cut down the administrative burden and fewer errors.

Issue cheque

On the other hand, the cheque must be signed by authorized signatory only and approval must be obtained for payment.

Ideally, the person authorizing the invoice for payment should not be the same person signing the cheques.

There are computer software packages available that write cheques and reconcile a bank amount automatically. Using computer software is the quickest and accurate way of writing cheques. The computer prints the cheques and records the payments for accounting purposes.

Regularly, prepare bank reconciliations. The use of computer-prepared cheques simplified the bookkeeping process.

Paying Bills Electronically

Another way to pay Bills is by electronically as an alternative to writing cheques. This has become increasingly popular and convenient.

There are different types of electronic payments:

  • Paying Online,
  • BACS payment,
  • Electronic Fund Transfer,
  • Standing Order,
  • Direct Debits,
  • Bank transfers,
  • Telegraphic transfer

These facilities have made global trading possible.

For instance, you may pay your staff directly by deposit salary to their bank accounts. You may electronically send PAYE and NIC to the HMRC. Besides, you also pay Companies House for your confirmation statement fee online.

Besides, Handling cash electronically also enable monies available sooner between banks and there is less chance of fraud.

Security is extremely important when paying bills online. Passwords and identification numbers are key to your company’s bank account. For this reason, they should never be left where unauthorized staff or the public can see them.

However, it is still a best practice to perform an accuracy check by reviewing the payments made electronically on a regular basis.

Bank Accounts Reconciliation

Doing bank reconciliation frequently is compulsory to ensure there are sufficient funds in your bank accounts to fund the payments made electronically. This includes direct debits, cheques issued, standing order and BACS payments.

Likewise, you must also update the suppliers’ accounts frequently to ensure no overdue payments. Keep an eye on any discounts offered by the suppliers for early payments. Because this provides further savings for your business if there is sufficient cash in the bank and payment can be made.

Petty Cash

Normally, petty cash is for paying small items, ad-hoc expenses, stationery, taxi fares, and for reimbursement of staff expenses.

You can usually set a maximum amount for withdrawals from the petty cash fund. For example, for expenses claimed up to £200 will be reimbursed from the petty cash.

Correspondingly, the person claiming petty cash must sign the petty cash voucher. Attached the expenses receipts to the petty cash voucher.

On the other hand, an effective cash handling procedure gives confidence to your Auditor that your accounting system is reliable and your company accounts give a true and fair view.

Recover debts from your customers

Recover debts from your customers as quickly as possible is important. This is because in your business, your your main income is from yours customers, but the income will only materializes into cash when they actually pay up! Until the customer pays, you are financing their needs.

Credit check

Your business is better off to keep your bad debts and your level of accounts receivable (debtors) to a minimum by having a good credit control procedures in place. It is recommended that your business always check the creditworthiness of your customers, either through a banker’s reference or by using an independent credit rating agency such as Noddle or Experian.

Customers with bad credit rating should be on cash on delivery terms. Your business should also monitor the time taken by your customers to pay you. The longer your customers take to pay, the higher chance that their debt will turn bad.

Early payment discounts or pay by installments

Encourage customers to pay sooner by offering early payment discounts or payment by installments.

Take legal actions

Do not be afraid of taking legal action to recover debts from your customers. Often, the threat of legal action against a financially unsound customer will make them pay up quickly as they do not want their other creditors to be aware of their financial situation because this may lead them stop supplying goods and services on credit.

Use aged debtors report to monitor

Most bookkeeping and accounting software comes with aged debtors reporting. This report is a simple report summarizing the amounts owed by customers and how old the debts were. You can see at a glance which customers are taking ages to pay.

An example of aged debtors report

If you are still using excel spreadsheet for your bookkeeping, and your customers base has expended steadily. Then, consider to invest in online bookkeeping software like Clearbooks or Xero.

However, you could create your own aged debtors report using excel spreadsheet if your customers base is manageable. And, a regular updating the report would not be a hassle and not taking considerable of your time.

CustomersTotalCurrent2 mtholder
LoveU Ltd£50K£30K£20K
Missed Ltd£300£300

Based on the above example, it may be wise to put in effort to get LoveU Limited to pay up the £20,000 sooner by offering discounts. At the same time, stop giving credit until the sum has been paid up. Similarly for Missed Ltd, the debt of £300 may need to be written off as bad debts in your company accounts if it is not recoverable.

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