As a creative business owner, keeping on top of your finances may seem dull, but it is also business 101. However, having been accountants in the creative industry for many years, we are always surprised to find just how many businesses are in the dark about their expenses.
With HMRC pointing the finger at small businesses for 56% of unpaid tax in their last annual report, it’s certain that scores of SMEs are now in the firing line when it comes to tax investigations. So, if you are a business owner, now more than ever it’s paramount you are on top of your expenses, in order to avoid a sticky tax situation.
But don’t worry, we aren’t trying to scaremonger you, we just want to ensure that you are aware of everything there is to know about your business expenses and make sure you are claiming correctly. This guide will walk you through the essentials of business expenses, explain how to deduct business expenses effectively, and ensure that you make the most out of your tax returns. As the old adage goes, there are two things in life that are certain: death and taxes.
While the former is an undeniably daunting prospect for most, the latter does not have to be as scary as you think, provided that you track your expenses correctly and claim everything you are due. So let’s get down to business.
Firstly, what are business expenses?
Put simply, a business expense is any cost that is necessary for the operation of your business. These can range from the rent for your creative studio or office, to the ink you buy for your printer.
Proper management and tracking of these expenses is vital—not only to keep your business running smoothly but also to ensure you’re prepared for the tax man. This is where knowing which business expenses are tax deductible – and which aren’t – becomes invaluable.
Why are business expenses so important to keep track of?
All business expenses should be recorded by your business. Otherwise, you’ll find yourself in hot water come tax season. Not only that, but your accounts will be all over the place. It’s important that everything is meticulously tracked to ensure that you know where your business is at, how much cash flow is coming in, and what your finances are looking like for the future.
What business expenses are tax deductible?
Identifying tax-deductible business expenses is the first step to being financially savvy, helping to ensure you keep more of your money and don’t get a larger-than-expected tax bill. Here’s a breakdown of some of the most common business expenses you can claim:
Business running expenses
There are a whole host of expenses that come with running a business that can be written off. This includes:
- Rent or lease payments for your office, studio, co-working space, or business premises.
- Utilities like electricity, gas, and water – this also applies to those who work from home.
- Office supplies.
- Equipment like computers, laptops or anything you use for your creative business.
- Maintenance and repair costs.
- Phone and internet bills.
- Business software (like Xero).
- Business rates and insurance.
- Bank and credit card fees.
- Interest paid on business loans or mortgages.
Employee Expenses
While many creative people start out on their own, as your business grows you will inevitably need some help. Part of the success of any business is hiring the right people to help you achieve your creative dream. But with employee’s come extra costs, and here is some of the common expenses you can claim for:
- Salaries, wages, bonuses, and benefits.
- Employer National Insurance contributions.
- Pension contributions for employees.
- Staff training costs.
- Staff parties (up to £150 a head – so don’t get too carried away).
- Payments to freelancers, subcontractors, or consultants.
Travel Expenses
Depending what creative field you are in, you may well do a lot of travel. This includes meeting clients, attending industry events, and, if you are lucky enough to have international business, trips overseas. But all this comes at a price, and one that you need to record correctly to ensure your tax bill is accurate.
This can include:
- Travel fares including planes, trains and automobiles (insert John Candy reference).
- Accommodation for overnight trips.
- Meals while away.
- Travel insurance.
- Fuel costs.
- Car repairs and maintenance.
Marketing and Advertising
Yes that’s right you can claim back the cost of advertising your business. For example if you use the services of a digital marketing agency or hire an agency for a rebrand this is all tax deductible. This also includes expenses like website design and hosting fees along with printed flyers, billboards, or a full page magazine spread. Even if you decide to give out free samples of your product, this too may be deductible.
Professional Fees
This can include fees paid to lawyers, accountants, or any business-related services. As well as membership fees for professional bodies or trade associations. This can also include training and development courses that help you hone your creative craft.
Bad Debts
While this is hopefully not a common expense when it comes to business, you will at some point come up against a customer or client who can’t or won’t pay. But did you know that if a customer cannot pay what they owe, you can claim this back? That’s right HMRC will allow this as a deductible expense so long as a reasonable effort has been made to recover the debt.
How to deduct business expenses
If you want your tax bill to go down faster than a cold beer at a summer BBQ then you need to pay attention to how you should deduct your expenses. Expenses require good record-keeping and a systematic approach. Start by maintaining thorough records of all expenses throughout the year. This helps avoid a panicked scramble for receipts and invoices by the time the tax year comes to an end.
Make sure to invest in accounting software as this will make your life a whole lot easier. Accounting software like Xero can replace confusing spreadsheets and ensure you can easily upload your business expenses in just a few clicks. That’s why we think it is undeniably the best accounting software for creatives.
Once they have been correctly input into your accounts, this information will be sent to HMRC at tax time and the total value will be taken off the income you are taxed on. For example, if your business made £100,000 last year and totted up £20,000 of deductible expenses, then you will only be taxed on £80,000.
Sector-specific deductions for creatives
Each creative field has unique expenses, and knowing which business expenses are tax-deductible in your specific sector can lead to substantial tax savings and save you from a higher tax bill.
For example, writers might deduct travel expenses to research locations or writer’s retreats. Photographers can deduct the cost of cameras, lenses, and other equipment. While musicians can claim studio time and musical instruments.
Understanding how to deduct business expenses in your specific creative field not only ensures you steer clear of an audit but also helps to make sure that you aren’t paying more than you should in taxes. Working with an accounting professional who specialises in your specific creative sector will help you to get the most bang for your buck.
If you want to find out more about what you might be able to claim, here are some small business expenses every creative business should know about.
So know you have better idea of what business expenses are tax deductable, lets more on to some of the common mistake we see business make when it comes to their finances.
Common mistakes and how to avoid them
Earning a good living in the creative industries is no mean feat. When coupled with the current financial landscape and rising costs to business, there’s no hiding the fact that the more money you can save the better. When you have created a successful business from scratch, you deserve to keep more of your hard-earned cash and avoid the pitfalls that mean you end up paying more.
To help prevent this, here are some of the most common business expense mistakes and what you can do to avoid them:
- Mixing personal and business expenses
This is an incredibly common occurrence, particularly in the early stages of your business. You are growing fast and have bills to pay, but you have not set up a separate business account. This causes untold confusion come tax time and will give your bookkeeper or accountant a major headache.
How do you avoid mixing personal and business finances, then? Always use separate bank accounts and credit cards for business transactions. This should be the first step in creating your business and will make your life a lot easier, we promise.
- Overstating your deductions
Overstating your deductions is easily done if you don’t know your tax obligations properly. Often there are niche rules that it is important to be aware of. For example, when it comes to car mileage you can claim 45p per mile for the first 10,000 miles and only 25p thereafter.
If you overstate your deductions this can lead to audits, penalties, and potential legal issues. So avoid it at all costs. The best way to mitigate against this is having a clear understanding of what expenses you can claim or hiring an expert that can do it for you of course.
- Overlooking small expenses
In these trying financial times every penny counts. While we are not suggesting that you turn into an obsessive penny pincher, you would be surprised how many little expenses can get left off your spreadsheet.
From parking charges to printing paper, these seemingly insignificant expenses do start to add up. So make sure they are being documented no matter how insignificant they may seem. Not only will this give you an accurate picture of your finances and cash flow but ensure you squeeze every last drop of deductible expenses out of your tax bill. As they say, take care of the pennies and the pounds will take care of themselves.
- Misclassifying your expenses
Accidently misclassifying expenses can lead to an inaccurate picture of your business’ financials and a higher tax bill if you have misclassified deductible expenses as non-deductible or claimed expenses you are not eligible for. It may seem simple enough, but as your bills pile up it is a very easy mistake to make – one that can be very costly in the long run.
- Ignoring business structure
Are you a sole proprietor, limited company or a partnership? This will have an effect on your tax obligations and what expense you are able to claim. If you are just starting up your business then read our guide on choosing the right business structure.
- Not reconciling accounts regularly
Reconciling accounts is when you make sure that your bank statements match up with your business record of transitions. This can be a tedious task and when business gets busy it can get put on the back burner. Not the end of the world right? Wrong. If you don’t have the correct financial data in front of you then how do you make well informed decisions for your business?
Not regularly reconciling your accounts means that any discrepancies or mistakes are not picked up quickly and it can leave you scrambling around trying to find invoices from months ago when you finally do decide to get everything in order.
- Ignoring tax regulation
Tax laws frequently change and with a general election looming imminently on the horizon, you can bet your bottom dollar that they will be set to change sooner rather than later. For example, do you know the implications of last year’s change to corporation tax or this year’s Spring Budget for your business? We know that keeping up with tax law isn’t top of your to do list. But if you have an accountant that knows what they are doing they should take care of this for you.
Why creative business owners need expert accountants (like us)
Investing in an accountant who understands the creative industry can be a game-changer. Such professionals are not just number crunchers but strategic advisors that go beyond letting you know how to deduct business expenses, but delve into effective finance management, saving you money, time and potential headaches in the long run.
For creatives, mastering the art of your accounts is fundamental to ensuring your creative passion also remains a viable business. By getting on top of your expenses, you set the stage for both your financial success and more creative freedom to do what you do best (and get paid handsomely for it).
So, if you are looking to get your finances in order with the help of trusted accountants then get in touch today.
At Raedan we specialise in helping creative professionals like yourself make their money work for them, through financial insight and solid strategy. So you can focus more on doing what you love.
