Tantric workshops, live lobsters, lap dances, oh my! Client entertaining has led to entrepreneurs expensing the most off-the-wall experiences. Does it pay off?
It’s a competitive world out there, but winning over clients has led to small business owners expensing outings to strip clubs and trips to Victoria Falls National Park in Zimbabwe. Others have expensed adult-size pink tutus and the costs of a cremation. Where do we draw the line?
It’s hard to imagine a world where lap dances are classified as ‘reasonable expenses’, but it really does depend on your industry, clientele and business priorities, says The Accountancy Partnership managing director Lee Murphy.
“HMRC’s guidance around what qualifies as a legitimate business expense can be vague and confusing and fines for getting it wrong can be high, so it is unsurprising that so many SME owners avoid claiming altogether,” he sayys. ”However, expenses that occur due to business circumstances are allowable in most instances, no matter how dubious they may seem.”
Research from The Accountancy Partnership reveals that more often than not, SME owners fail to claim business expenses because they worry about the risk of penalty payments if their claims don’t qualify. 44% of SMEs in their database would rather err on the side of caution which could be costing them heavily at the end of the tax year.
The research found that 65% of UK small business owners let over £10,000 in allowable expenses go unclaimed each year, meaning almost 4 million businesses are missing out on tax relief and potentially hampering profitability.
HMRC allows business owners to deduct costs incurred in the running of the business from its taxable profits, reducing their overall tax bill. Allowable expenses are any reasonable costs that arise as a direct result of the business.
So while a mass purchase of sex toys from China may have led to some giggles at HMRC, for an e-commerce business, it is a legitimate and allowable expense.
“Our research suggests that around £5.6billion in expenses goes unclaimed by small business owners every year due to hesitancy, which seems to be endemic,” Lee adds. ”Allowing seemingly small costs to aggregate means many businesses are missing out on substantial amounts of tax relief, which may impact profitability and overall business health.”
While the research revealed eyebrow-raising expenses for a venus flytrap and a fart machine, it also shows that small business owners need to be transparent with HMRC.
Finance and accounting professionals are experienced and knowledgeable when it comes to claiming expenses, so your bookkeeper or accountant should always be your first point of call if in doubt over whether or not something qualifies as an allowable expense, Lee explains.
“Of course, fines can also seriously harm small businesses, so it is crucial to keep meticulous records of expenditure and financial documentation to support any expenses submitted in case they are queried by HMRC.”