How to deal with making a loss

Hi There

In these difficult business times, have you thought about how to deal with a loss in your business? Losses made in your business may be offset against other income if they are related to the trade and we can advise you on how to plan for this and even use your capital allowances as a tax planning tool. Contact us on for more tailored personal advice.

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Claims for Expenses

Good habits when calculating expenses:

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Expense tax deductible

Self Employed

Limited Company

Accommodation costs- can claim those for a business purpose, workplace, stop over for business travel

The expense used for the sole purpose of the trade/profession can be claimed

Be aware of Capital Gains Tax and VAT on capital costs (can be claimed if VAT registered) such as office building, modifying or converting your home, Stamp Duty Land Tax which is paid by the buyer on all residential buildings, Capital Allowances can be claimed  on fixed assets for business purposes. You can claim repairs and renewals on decoration and replacement of floors, coverings and windows which relate to the business. Make sure these are not improvements though because this would be capital expenditure.

Entertainment- clients, customers and third parties

You can claim tax relief on room hire for an event such as advertising and marketing.  The cost of entertaining is not tax deductible and must be added back in the accounts. Again you can claim expenses incurred in the line of business. Entertaining staff can be claimed under staff welfare. Keep records to show evidence of the entertainment, the benefits to the business and the cost. Claims cannot be made if the entertainment is part of a corporate event. Input VAT can be claimed for overseas customers.

Business gifts

A business sample can be claimed as advertising, an advertisement gift of less than £50 but not food, drink, tobacco or a voucher. VAT can be claimed on irregular gifts. Gifts can be claimed, but not cash, to charities for cultural, religious, recreational or benevolent purposes.


For trade associations are tax deductible

Medical and Dental

Not allowed unless it is proved exclusively for business not private benefit


Reasonable amounts can be claimed for travelling trade and the destination is not regular

Training and course fees

Business training for new skills of personal benefit is not allowed, business training for professional development is allowed. Once qualified, tax relief may be claimed on subscriptions.

Employers can claim training costs


Allowable for business needs. If the journey has some private reasons, this portion should be removed. Accommodation and subsistence may be claimed as mentioned earlier. Home to work can be claimed if it is the main workplace or a travelling occupation. Cannot be claimed if there is a third base which is frequented- not home or an operating business base.

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What are the different forms of business ownership and which is best for me?

Congratulations on starting your own business.

You will have spent some time on thinking about which form of business ownership is best for you and, as you already know, there are 3  types of business ownership: Self-employed, Partnership or Limited Company. If you are self employed, you can still employ other people of course and you will need to take care of their wages, NI and tax. Partnerships are formed where there is more than one person and ownership is shared equally among the partners. There is also a liability in terms of one partner’s debts become the other partner’s debts too.

Which one of these is best for you depends on your needs and your type of  business. There is also the question of how much time you have and are willing to spend planning ahead. As your business grows and you have more tax and legal obligations an extra bit of time invested can go a long way.

In this article I am going to talk about limited companies and the advantages of forming a limited company for you. Limited companies are legal entities in their own right which means that only limited companies, not people, are liable for any debts. The company is limited by the number of shares held.  Having a  limited company allows you to offer different types of shares to shareholders based on their personal tax circumstances. Dividends, the payments earned from share ownership, can also be waived on the transfer of income from a higher rate to a lower rate tax payer, this would save tax.

The limited company also has advantages when it comes to inheritance tax and trading. Even if the business owner dies, the company will still exist so it can carry on trading.It would not therefore be liable for inheritance tax.

You can also claim tax free employee incentives and benefits as the company can claim tax relief. This is not possible if you are a self employed employer.

If you are unfortunate enough for your company to make a loss you can also transfer it and take relief on it from salary and dividends. The condition for this is that 75% of the shares must be kept by the shareholder in the year the loss is made.

If you choose to form a limited company you will have to pay corporation tax, on your profits, in addition to your other taxation liabilities. If your company has less than £300, 000.00 in profits then you will pay corporation tax, on a small profits rate of  20%. This is less than the  comparable  income tax of rate of 50% and tax savings can be made through limited company status. If the drawings from the business are taken as salary, this may attract the higher taxpayer rate. If drawings are taken as salary, expenses and dividend payments this will reduce the overall tax burden.

Corporation tax is payable to HMRC nine months after your year end which gives you some time to pay it and can help your business liquidity as a result. Make sure though that you put this money aside so that you will have it when it is due. Profits, on which corporation tax is paid, are worked out before dividends are taken for shareholders.

Tax savings are one of the major incentives behind forming a limited company. These tax savings are at their highest when the company is making good profits and the directors/ shareholders do not need to take all that money out each year.

But bear in mind that as a director of a limited company, you are also an employee of the business and need to pay tax on your salary (including benefits in kind, dividend income and other income derived from the company) and operate PAYE and National Insurance contributions for yourself and all employees.

Another tax that you will have to manage is VAT. Value added tax is paid on goods and services in the UK and is paid by the consumer at 20%. As a business owner, you can choose to be VAT registered or not. If your turnover exceeds £77k, you have to register for VAT.

The VAT rate varies according to the item. For items which are standard-rated or reduced-rated for VAT, VAT is charged to the buyer (output tax) by the VAT-registered seller. This VAT is reclaimed by the VAT registered buyer (input tax) after goods and services are purchased. If you are registered for VAT, generally you charge VAT on your business sales and reclaim VAT on your business purchases. The difference between the VAT you charge and the VAT you are reclaiming is the amount of VAT you must pay to HMRC. This can be a little confusing for business start up to understand.

To make things easy for yourself, and if your turnover is less than £150,000, you can use the VAT Flat Rate Scheme. The advantage of this is that instead of working out all your expenses and invoices you pay a % of your gross turnover. The percentage you pay depends on the business sector you work in and in your first year of registration, you can deduct 1%. For example if you are a freelance photographer, your flat rate would be 11% (based on 2011 rates) and in the first year of being registered you are allowed to take off 1%, so this would be 10%.

To give an example then;
You quote a job at £2000 and add VAT this would mean you invoice for £2400. (+ 20% VAT for the customer)
You would need to pay £240 Flat rate VAT  to HMRC (10% of £2400)
This means that you get to keep the extra £160! (£400-£240=£160)

The downside is that you cannot claim any VAT back from your business expenses (unless an single item totals more that £2000)

As a business owner, in difficult trading conditions, it is good to hear about ways to reduce your costs. There are still incentives available to your business in the form of allowances, reliefs, incentives as well as tax credits. The  Capital Allowance Scheme, for example, gives you tax relief on necessary business equipment, like computers, cars, tools or furniture that you intend to keep. Be aware that if you buy an items on hire purchase, you can claim a capital allowance on the original cost of the item but the interest and other charges that you may have count as business expenses.

You can also claim research and development relief, which can reduce your tax bill or, for some small or medium sized companies, provide you with a cash sum. The aim of the R&D Relief is to encourage greater R&D spending in order to promote investment in innovation. If you need any more information than this article gives you, HMRC have produced an excellent document which is well worth a read. It is called “Working Yourself” and is available here, just double click on the hyperlink →working-yourself

Have a look and happy trading. Below is a case study example of a limited company that specialises in hair extensions. Thanks to Business Link for this video.

Case study

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Save time and money for your business

Did you know that you can save yourself time and keep track of your finances easily? Xero is used by Financial Growth Solutions Ltd and is included in your fee. Xero also gives you a visual map of your financial performance so that you can share with your staff and all your stakeholders easily. Have at look at this business recommendation.


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Government relaxes rules for home-based businesses

On August 15th 2014, the government announced a new set of measures that will make it easier for people to run businesses from home. The planned legislation will allow people to run businesses from rental properties, remove the need (in most cases) for planning permission, and – importantly – release most home-based businesses from any potential liability for business rates.

With 2.9 million home-based businesses contributing £300 billion to the economy each year, this news is a welcome boost.  So, whether you already run a business from home or are just thinking about doing so, what’s the best way of organising the financial side of the arrangement?

The easiest option is simply to reclaim expenses from your company.  The other is to charge rent to the company.  Here’s a summary of how each of these works.

Reclaiming expenses

As a Director, you can reclaim expenses from your business if you have to work from home.  You’ll have to be able to justify the need for home-working.  The most common justification is that there is nowhere else to work; others could include having to provide services or do background work such as software updates out of hours.  If you only have to work from home some of the time, it’s worth keeping a diary of what you do to prove to HMRC if necessary that the work is substantive.

Providing you have a clear case for needing to work from home, you can reclaim up to the standard home working allowance of £18 a month without keeping a detailed record of expenses or providing receipts. Above that, receipts will be needed.

What you can claim for

Allowable expenses include:
•    A (reasonable) proportion of metered heat and light.
•    Business calls made on a home phone.
•    The cost of insuring business equipment,
•    Repairs to business equipment.
•    ISP/broadband costs (if the contract was taken out for business use).
•    A proportion of cleaning costs where work is of a type that necessitates extra cleaning.

Make sure you submit claim forms and receipts if applicable monthly or quarterly, and ensure you get a payment back. Don’t pay any of the domestic expenses through the company, as this then becomes a benefit and liable for income tax and national insurance. It’s fine however for the company to pay directly for company-specific services such as broadband or a phone line.
If you supply your own business equipment and shelving, you can claim capital allowances on these items.

What you can’t claim for

Expenses you can’t claim for include:
•    Mortgage interest or rent.
•    Water rates.
•    Expenses without receipts e.g. a cleaner’s cash wages.
•    Redecoration of a home office.

Charging rent to the company

If you rent out part of your property to your company under a licence agreement, you can then claim tax relief on mortgage interest and council tax.  Remember though, that you will then have to declare any rental profit on your personal tax return.  Any rent charged should be reasonable in relation to local market rates and reflect your legal responsibility as a director to act in the best interests of the company.
Charging rent can be a good option if the numbers work out; and there is also the possibility of reclaiming VAT on the cost of building work done for business use. Any such claim will, however, be blocked if you also benefit from the building work in a personal capacity.

Please note that the rules for self employed people differ to that of directors.

If you’re not sure you are getting the maximum benefit from your home office arrangements, we’d be happy to help. Just email me here or give us a call on 01625 869712

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