I have a new client who uses a business bank account for his business which only a small amount of transactions are put through. The majority of his expenses are paid for by a credit card which is used for both business and personal. He gives me the statements marked up with which transactions are business expenses, however not all of them have receipts and many of the expenses are large restaurant and supermarket bills which he says are subsistence and entertainment expenses.
I've just processed my first month of work for him and have told him that he needs to keep his receipts from now on.
I'm a little uneasy about some of the transactions so should I just flatly refuse to process any future expenses that do not have receipts? Is it ok for him to use the credit card for both personal and business?
The restaurant bills would not be allowable (that's a general rule, there are some very limited exceptions to that rule).
The purchase of their groceries through the business would not be allowable full stop.
Remember for both of the above that the rule that we eat in order to live, we do not eat purely to work therefore the purchase of food fails on the duality of purpose test.
For other expenditure I try to get clients into the mindset that if there is no receipt then it never happened.
You should try to talk him into getting a business credit card as the use of his own credit card is breaking down the difference between the business and the business owner (is this a self employed business or a limited company? The issue is less pronounced for the self employed where the owner is the business).
Welcome to the fun world of reprogramming clients from the belief that they can basically live tax free by everything they buy being an expense of their business.
kind regards,
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
That makes things a lot clearer. I have a couple of clients who put through quite a few restaurant receipts stating they are for 'entertainment' purposes. Think I will have a bit of a battle on my hands but as long as I'm happy that what I am saying is correct I'll push forward.
Even though not allowable, legitimate entertainment expenditure could still be recorded in the accounts which should give you less of a battle but you need to make the situation clear that although going through the books it is not an expense that is allowable for tax purposes (like depreciation but without any balancing capital allowances).
For business users they can put legimate entertaining through the business but they just need to appreciate that such is not allowable as a business expense so will be added back to profit for tax purposes (tax and NI for self employed).
The groceries are a complete no no on all levels though. (you can quote the eat to live line)
kind regards,
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
I'll add the nice little side comment that any legitimate entertaining is always T9 - you can't claim VAT on any of it!
The only company I do work for where 'entertainment' is an issue I have standing orders from the accountant to dump it all in an entertainment account and he 'sorts out' the owner! Makes for some lovely adjustments and journals at the end of the year!
That's not strictly true as you can claim VAT on employee entertaining as long as it is within HMRC guidelines. So staff parties and outings etc are fine, but only the employee element (ie not their partners/spouses).
-- Edited by Dinky on Tuesday 27th of May 2014 08:39:04 AM
There are no employees in this company (just the director) although he does have the odd lunch with a business associate.
I had already told him that there is no VAT reclaimable on entertainment expenses (he was quite disappointed), and I will challenge him further and let him know they actually cannot be used for any tax purpose. Ones that have already been posted have gone to the Entertainment account so they are easily identified.
I'll be quite forthright about the supermarket spend! He can take it up with the HMRC if he has an issue with it!
A business associate is not an employee, so it would be entertainment - no tax relief, no VAT. And as Sue says there are guidelines for staff entertainment (I have a client who just started putting everything through as "staff entertainment" because he thought this was allowable (who knows who he really took out!) - I just put this to entertaining as well, except for the annual christmas party - less than £150 er employee). You have to be careful you don't claim an employee P11D situation. As long as the company gets no VAT/tax relief on the entertaining, its usually accepted that there is no P11D issue. Where an entertaining investigation arises, the usual problem is whether it was allowable entertaining, and whether it should have actually gone against the directors account. It aint pretty!! They want names of people and purpose of meeting, so I would be asking your client to write a note of attendees on the restaurant receipt - just in case! And if he gives you that information, all you can do is accept it as being the truth.
Always really struggle with this one and the concept of the "eat to live line" as much as the "entertaining not allowable line".
We all know that both do exist and provided are within a structured company set of rules do happen.
Yes, agree these are "not allowable" as costs against profits, so disallowed for tax, but these do happen and for OP question would suggest more clarity on "allowable" for costs to reduce tax and "downright not allowed".
Clearly if this is sole director of limited company he could dine out every night and just claim to have been entertaining clients, which could and should land him/her in jail and obviously isn't allowed in any sense of the word, as is I guess fraud.
But, entertaining of even UK based clients does happen and it is "allowed" for a director to recover these legitimate cost from business via expenses or use of company credit card, but is "disallowed" as cost for tax calculations, so should be coded correctly for accountants to adjust on monthly or year end figures.
Similarly, whilst accepting Shamus "eat to live" as the strict rule from HMRC, I have never seen any business reject an employees claim for Starbucks and sandwich when in London on business having travelled from Manchester that morning.
Common sense and good company policy applies. If travelling a few miles from work/office and not being expected to be up at 5.00, then guess company policy could be "take a sarny, or buy your own", but in most cases a reasonable expense on buying lunch if away from office for work is accepted by employers and I guess added to the "disallowed" costs for CT calculations?
Always drives me nuts that bookkeepers let alone HMRC should be asked to always assume employees or even company owners are out to defraud by claiming expenses for a sandwich or dinner with a noxious client they'd rather not be with anyway :)
Am sure others will correct me, but that is my take on being an employee who travelled A LOT and a Director who does the same now.
PS: Next someone will say Business Class or First Class travel cannot be allowed as you could get there for less cost in Economy and the plane goes to same place, so why pay more!
When I started where I am currently working, employees had been used to claiming breakfast/mid morning refreshments/lunches etc etc whenever they wished and to whatever value they wanted. Staff were travelling to events where refreshments would be provided on arrival and still leaving home early enough to stop for breakfast and maybe even coffee en route. They saw this as their 'right' and it was encouraged by one of the Directors who was probably the worst offender.
So I introduced HMRC's benchmark scale rates for use in claiming subsistence expenses - http://www.hmrc.gov.uk/manuals/eimanual/EIM05231.htm
As you can imagine, I was not Mrs Popular for a while but in the end I won them round. Funnily enough, a large part of the business has now transferred to a national retailer and they don't know what has hit them in terms of policies and procedures!
If an employee usually takes their own lunch to work, then unless they had to leave very early in the morning, why should an employer pay for them to grab a sandwich out?
I'm quite jealous as I used to love flying everywhere both with work and just for fun (craziest that I did was just popping to Thailand for the weekend!). I think some like it and some don't. Personally I fall in the love to travel category.
If you read a few up you will see that we are all in agreement that one can put the expenses through the business but they are simply not tax allowable.
In my first post of the thread I stated that such was a general rule with exceptions and you are right in that if you are genuinely working away then a daily allowance for subsistence is available (so the sandwich & coffee that you speak of).
That would not however extend to a tax benefit for having a Coffee at Euston where you are not actually staying away overnight.... Unless you are a long distance lorry driver for which special rules apply.
Think of the rules as they exist as being put in place to stop the fraud but in doing so also stopping legitimate expenditure on entertainment.
I think that Americans looking at the UK tax rules on this would have a heart attack at seeing such restrictions on busness entertaining.
On the question over first/business/cattle class travel that one's quite interesting as whilst HMRC may argue over you buying a coffee at Euston station the class of travel to get there is not generally questioned. Certainly I would see no issue with people travelling business class although paying the extortionate amount for first class air travel may be pushing one's luck a little too far. (although, big four partners don't travel business class).
And as for doing business in the far east where one is expected to buy a nice and very expensive meal in order to do business the UK tax system is actively working against business where the American tax system works for it.
Unfortunately, whether I agree with the system is of no consequence, all that concerns me is keeping my clients out of jail and free of penalties, interest, fines and surcharges.
Anyway, you've just reminded me that my passport has now expired so need to get that sorted out as I've still got a shed load of Airmiles and Avios points to spend... And never know when I might need to flee the country at short notice, lol.
Hope that you start having fun in Shanghai.
kind regards,
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
I would say it's okay for him to use the credit card for business and personal, as long as the company only pays for his business expenses and not the whole bill. I've experienced lots of clients that do this, I find it's okay to give them the benefit of the doubt but just make it known to them that if they don't provide a receipt then you may refuse to process it - if you don't want to cause hostility maybe tell them you regulatory body is cracking down on this kind of thing or something.
