Business expenses are part and parcel of running any small business. Even if you run your business from home with minimal equipment, you may still be able to claim back tax on costs incurred, such as electricity and consumables. So it’s in the interest of all small business owners to track expenses efficiently.
It is vital for small businesses to keep a record of their business expenses in order to claim tax deductions. The most efficient way to track your business expenses is with accounting software, which will soon become compulsory under Making Tax Digital.
When it comes to claiming tax deductions, unfortunately it’s a case of snooze and you lose. As a small business owner, you are responsible for recording your business expenses in an accurate and timely way, and submit them to HMRC as part of your tax return. If you don’t, then you will simply pay more tax.
Here is Approved Accounting’s useful summary on why and how to track expenses.
- 1 What is classed as a small business expense?
- 2 Why is it important to keep track of business expenses?
- 3 How do small businesses record expenses?
- 4 Accounting software for small businesses expenses
What is classed as a small business expense?
If you are self-employed, a business expense is any cost incurred that is necessary to run your business, sometime known as operating expenses.
Allowable expenses include the cost of equipment, stock, utilities, uniform, subscriptions, rent, travel and professional fees (such as accountancy!).
To be classed as “allowable”, the expense must be “wholly and exclusively” for business purposes, ie. not personal expenses.
Why is it important to keep track of business expenses?
1) Pay less tax
Business expenses are tax deductible, which basically means you will pay less tax. When you submit your annual tax return, you will be required to declare your total income, less expenses. The remaining net profit is the amount you will be taxed on.
Less expenses £1,000
Taxable income (net profit) = £24,000
Tax payable = £24,000 x 20% = £4,800
If you were to lose track of your expenses throughout the course of the year, your submission could look more like this:
Less expenses £500
Taxable income (net profit) = £24,500
Tax payable = £24,500 x 20% = £4,900
That’s £100 out of your pocket. Sure, this is a simplified example, but you get the idea.
So when it comes to small business expense tracking, it literally pays to have a good understanding of what you can claim and to establish good accounting habits to manage expenses. After all, you are the only one that will pay for any oversights.
2) Manage your cash flow
Without an accurate and up-to-date record of your business finances, you risk losing sight of your expenses versus income. You could find yourself with negative cash flow, which can be disastrous for a small business.
For a small business owner, time is a premium, so you need to ensure that whatever method of tracking expenses you use is as efficient, accurate and sustainable as possible.
By far, the most efficient way to log business income and track business expenses is by using cloud accounting software. It allows you to log transactions with ease and provides an accurate snapshot of your business finances whenever you need it.
That allows you to stay on top of expenditure and make informed decisions on how much you are spending.
3) Easier tax returns
It’s rare to come across business owners who actually enjoy the tax return process! It can be time consuming and confusing, with the threat of severe penalties if mistakes are made.
For most businesses, it’s easy to provide a record of income – who doesn’t like counting their profit? But when it comes to expense tracking, it’s all too easy to be less disciplined.
If you lose sight of your business expenses throughout the year, then you will face the unenviable task of scouring months of bank statements and piled up receipts with the deadline looming over you. Not only is this tedious and stressful, but subject to error.
Keeping track of your expenses on a regular basis needn’t be onerous. It requires a little and often approach, and is made simpler with the use of accounting software, such as Xero.
How do small businesses record expenses?
The days of receipts in drawers and invoices gathering dust in binders is over. Well, almost.
Although it is already a requirement for most, from April 2024 all small businesses earning over £10k and under the VAT threshold of £85k will be legally required to keep digital records of their income and expenditure, as part of Making Tax Digital (MTD).
MTD is the government’s effort to digitise the tax process, making it easier for businesses to keep on top of their tax affairs and submit their returns more accurately. Under MTD, businesses are required to keep their records in approved accounting software, such as Xero.
So the advice of any good accountant would be to start using approved accounting software to log your income and expenses ASAP, to avoid unnecessary stress nearer to the deadline.
If you are still relying on paper receipts or using a spreadsheet for tracking business expenses, Approved Accounting can help you transition to cloud accounting software with ease.
Do I need a separate business bank account for expense tracking?
As a sole trader, you are not required to have a dedicated business bank account. All business transactions, including your expenses, can go through a personal bank account if you wish.
However, it’s certainly beneficial to have business costs go through one bank account, to make tracking expenses simpler. By having all business purchases on one bank statement, it makes it much easier to copy it over to your ledger.
In reality, you are likely to use your own money to buy things for your business from time to time. You may also have to reimburse staff or family members for business related expenses. That’s when it’s easy to lose track.
So it’s important to create a process to track business expenses as they occur, and stick to it.
Do I need to keep receipts?
While you are not required to submit evidence of your business expenses with your tax return, HMRC could call upon you to provide them. They require that you keep a record of all transactions for at least five years.
Accounting software for small businesses expenses
Online accounting software makes expense management easy and convenient. It can provide you with accurate financial statements and expense reports at the click of a mouse, or even a tap of your phone.
The beauty of cloud accounting is that you can track your business expenses on the go. It is live and can be accessed or updated on any device, wherever you may be. The only downside is, there’s no excuse for losing track of your expenses!
If you are prone to forget about recording expenses, or simply don’t have time to sit at a desk each day, it offers the ideal solution for tracking your small business expenses.
There is an abundance of online accounting software on the market, a lot of which is included within the government’s approved software list.
At Approved Accounting we choose Xero as our preferred supplier and are proud to be a Xero Gold Champion Partner. We think that Xero is simply the best all-round product for small businesses to gain control and clarity over their finances.
Xero makes expense management faster and error-free. To record an expense, you simply need to copy and paste the details of your transactions from your bank statements, or scan in a receipt. You can do this wherever you are, on your phone, computer, laptop or tablet.
We are strong advocates for Xero as we’ve seen so many business owners benefit from it. It can save you time and stress, reduce the margin of error and, ultimately, improve the financial health of your business.
It literally pays to stay on track of recording your expenses as you can deduct them from the profit you declare to HMRC and reduce your tax bill. It also helps you to manage your cash flow and make more informed decisions about your expenditure.
Recording expenses requires a disciplined, little and often approach to ensure you don’t lose track. This is a much easier task with online accounting software. You’ll thank yourself when it comes to year end and you can submit your tax return efficiently and with confidence.
If you are not already using accounting software, now is the time to start. An experienced chartered accountant, such as Approved Accounting, can help you to make the transition to software, such as the market leader, Xero.
How Approved accounting can help you
At Approved Accounting we don’t like to see small business owners paying more tax than they need to. We help many sole traders and limited companies with expense tracking, including advice on allowable expenses, bookkeeping and using online accounting software.
We understand that not everyone is as comfortable with technology as the next person, but you won’t receive any judgement from us. Even if you are still keeping paper receipts and using pen and ink to record your finances you needn’t worry, we’re here to help.
Thanks for reading, we hope you found this guide helpful. If you would like to find out more about how we can help with expense tracking, please get in touch.