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Five common tax traps to avoid when running your small business

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Whether it’s working out how much to pay to HMRC, calculating your VAT liabilities or identifying what tax relief can be claimed on your business expenses, it’s a complicated issue fraught with pitfalls.

Misunderstanding tax can also be damaging for your business, as you could potentially hinder your cash flow by paying more tax than you should, or face penalties from HMRC for not paying all of the tax that you need to.

So how can you stay on top of your small business tax and make sure you keep on the right side of the taxman? Here are five common tax traps to watch out for.

1) Claiming too much for food and drink

It’s tempting to claim in your accounts the cost of any food and drink you buy when you’re working, but HMRC takes a much sterner line than that. HMRC says that, because everyone must eat in order to live, food and drink by its nature is partly a personal cost and will only allow you to claim the cost of food and drink in certain circumstances.

If your business is a limited company, you can claim the cost of food and drink when you’re out and about on business. For sole traders, the rules are stricter. As a sole trader, you can only claim the cost of food and drink when you’re out and about if either:

  • you’re away overnight
  • the journey is outside your normal pattern of business, or 
  • your business is itinerant by nature so that you spend short periods of time at lots of different client sites.

2) VAT on business entertaining vs. staff entertaining

Entertaining customers and other business contacts is part of business life, but HMRC rarely accept it as a necessary part. That means they won’t let you claim VAT on the cost of entertaining anyone other than bona fide current employees of your business. 

Don’t make the mistake of treating individuals, such as subcontractors, as employees and claiming VAT on the cost of entertaining them.

3) Claiming too much for business use of home

The rules for limited company directors (and other employees) for what part of your home-running costs you can claim back from your employer (the company) without paying extra tax, are quite tight.

You can’t claim any part of fixed costs that you’d pay anyway whether or not you worked at home, such as rent or council tax. You can’t claim any costs if the work you carry out at home isn’t work that earns money for your employer – so you wouldn’t be able to claim costs if you’re completing administrative tasks at home, unless you are an administrator.

And you can’t claim any costs if your employer provides workplace facilities elsewhere but you choose not to use them and work at home instead. Here is what you can claim.

Find out about more tax traps on page two…

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