Helping accountancy clients understand business expenses

Why your clients can't have a Lamborghini on the company

If you have clients that are new to business, you may find that business expenses come as something of a mystery to them.

They understand that ‘writing it off as an expense’ is a good thing, but while it sounds as though it might mean free money, they don’t understand the reality.

In fact, some small business owners seem to be under the impression that business expenses mean they get the money back, somehow, possibly from the government who have suddenly become uncharacteristically generous. Every year, accountants like yourself find themselves faced with expense claims for items like supercars - and have to explain to clients just why they are not an allowable business expense.

You need to explain why expenses mean - with your help - legitimate business expenditure that can be offset against profits and, hence, tax liabilities. But your clients need to understand what they can and can’t claim for – and that, whatever they do, HMRC will not really be picking up the tab.

Helping them understand this is important, as without this key knowledge business owners can often splash out on purchases – from office equipment to lunches or even a supercar - that they don’t actually need and can’t actually afford.

Explaining to clients how business expenses work

It's important to explain to your clients who are new to the exciting world of business, and to the possibility of business expenses in particular, that they need your help - if their business expenses are to be approved by HMRC, they have to fall within the accepted guidelines.

What’s more, their business need to have made the money as profit before they can think about setting business expenses against it.

In other words, business expenses only count against actual profit figures. This means that when you – or HMRC - calculates their tax bill, business expenses can be used to reduce the tax liability that they must pay. It will not, somehow, create any extra cash.

Your clients need to understand the following truth:

Turnover is all the money going through the business, and can be seen as income. Income minus expenses equals profit. Tax is charged on profits, so maximising business expenses can reduce profits – and therefore reduce tax.

As an accountant, it is obvious enough – but remember, your clients are not accountants, and what is obvious to you can be a complete mystery to them.

Do your clients have a funding need? Do you want to add an extra revenue stream and more value to your clients? Find out how you can provide an additional service with business finance

An example to share with clients

If a florist charges someone £1000 for the flowers at a wedding, the turnover is £1000. However, they have to pay a wholesaler £500 for the flowers, so it looks as though the profit is £500.

But they don’t need to pay tax on £500. They may have actually spent another £250 to enable them to deliver the order.

This means saving half the cost of the tax payable.

But the costs their business has faced do not stop there. There is the cost of delivering the flowers, which means running a van. There are also all the overheads of running the business, with a shop, staff costs, business rates, advertising and much more besides.

A proportion of all these costs needs to be set against the profits of the wedding deal. By looking at all their business costs and setting them against all the profits they appear to have made, it is possible to reduce their overall tax bill.

This is, of course, where you come in – and why you are so essential to your clients' profitability.

Explaining what they can actually claim for

But even when clients grasp the idea that business expenses can only reduce their tax bill, you may have a second problem – helping them understand what and what is not a legitimate business expense.

Every year HMRC see bizarre expense claims from businesses who think they can write anything off – and who may not have had the advice from an accountant who could have steered them in the right direction.

You need to explain that all business expenses must be literally expenses of the business. In other words, they must be things bought directly for the purpose of conducting business. Wages for staff, diesel for the vehicles, stock and office supplies are legitimate business costs. A new suit (unless it is a uniform or protective clothing) is not, and neither are meals, entertainment, or the owner's rent or hobbies.

Two more key thoughts to share with clients:

• Anything that is not used solely for the purpose of the business is probably not a real expense – and won't be allowed by HMRC.
• Falsely claiming for expenses is tax fraud - something HMRC does not take lightly. They could be fined or even end up with a criminal record

As with anything finance or tax-related, if they are unsure, they are always better off seeking your advice.

If clients can’t use expenses to solve all their cash problems, what is the answer?

You can give clients a steer on making the most of their legitimate business expenses. But once clients understand that they can’t expect ‘business expenses’ to create the cash they need, what help can you give them?

The answer is to partner with Rangewell.

At Rangewell, we are experts in business finance. We help all types of business access all types of funding. With so many options and alternatives available across the lending market, that expertise is vital for your clients. Not only do we know all the different types of business funding available, we know the lenders who can offer the most competitive rates. We can even help you streamline the application process when your client's need for cash is urgent.

We have a team made up of experts in business funding and work with all types of business finance products from lenders across the entire UK market. So when you have a client with a funding problem - and trying to claim a business expence just won’t solve it - you can simply call on us to help you find the solutions they need - our expertise works for you.

Not only are our services free for you to call on, we make no charge to your clients. In fact, we are able to pass commission from lenders on to your practice.

To find out more about a working partnership with Rangewell to find better answers to your clients funding needs, call us at Rangewell on 020 3637 4150 - or email contact@rangewell.com. Our service is free.