Working independently can transform your professional life. But earning outside of PAYE means additional responsibilities – including managing business expenses every tax year.
You’re required to collect the evidence for those payments and send them to HMRC by 31st January. Claims on Self Assessment tax returns can’t be verified without dated and accurate expense receipts.
Without receipts, you can’t claim on expenses and reduce your tax liability. Additionally, you could be fined or be put under investigation for claiming expenses without the sufficient paperwork.
But cataloguing receipts is easier than you may think. In this blog, we cover the best practices for receipt collection, so you can work without stress or any second guessing.
Understand what a receipt looks like
First, what is a receipt?
There are several definitions. Essentially, a receipt is a record of any financial transaction – in this case, to validate business expenses, which you’re able to claim tax relief on.
Here are a few of the main types of receipts:
- Paper purchase transactions
- Bank statements
- Commercial receipts, i.e. from a loan, lease or capital asset
- Utility bills
One or several of these forms of evidence can tell HMRC whether your business expenses are allowable or not, for the amount specified on your Self Assessment.
Remember that receipts also count for the income you receive, like the invoices you issue. Sole traders, freelancers and contractors must legally report all income they make outside of PAYE.
How to manage business receipts
Organisation is key when it comes to developing a receipt system that works and isn’t overwhelming. For an accurate expense submission, you need to lay payments out by date and category.
It helps to separate your evidence into groups, each of which relates to a different aspect of your expense collection.
For example, you may travel for business – claiming 45p on your car’s first 10,000 miles in the tax year, and 25p for every mile after that. The evidence for this (mileage log and car running costs) would be gathered separately to homeworking bills, trade subscriptions or equipment purchase.
The better you can sort receipts into categories, the easier you can spot whether you’ve gone over a certain limit for that expense type (like the mileage situation described above). Once you have such knowledge, it could make more financial sense to claim a flat-rate allowance.
It’s vital to then put your expense receipts into chronological order. Dates tell HMRC that all of the expenses have occurred with the frequency you’ve described.
You’ll need to start from the beginning of the new last tax year (6th April) and finish at expenses incurred till the end (5th April the following year).
We also suggest keeping receipts for six years, in case there’s an HMRC enquiry.
How can you store business receipts?
This is the critical question. When figuring out how to manage business expenses efficiently and easily, it’s worth looking at the tools available in the digital age.
People have been using Google Drive for receipts since 2012. It allows you to create a folder, just like the sort for documents and spreadsheets, into which you can upload and save receipt data – accessible from anywhere via the cloud.
Take a photo of the evidence with your phone. Then manually add it to your chosen folder, with the right category assigned.
This is one of the most popular receipt storage apps in the world. Business expenses are covered with Evernote’s photo capture system, which also works offline if you’re stuck for signal.
However, it isn’t built solely for expense claims – all you can do is record documents, as the rest of the app is designed for making lists and notes.
Many businesses have a Dropbox account. But did you know that it can be synced to Receipt Bank software, creating two new folders that hold every piece of evidence you file?
It’s only available to two types of Receipt Bank customers – those who have a Business Plus or Premium account. And again, it’s somewhat limited because you’re only able to store the data; you can’t integrate it with an online Self Assessment.
Start better business expense management today
Ultimately, you must rethink evidence collection if you want to reduce your tax liability and earn what you’re entitled to.
Begin with identifying the paperwork that counts as income and business expense evidence. Next, specify what every piece of evidence is meant to show, keeping similar documents in one place.
Then map them out throughout the tax year – what came first, what followed, and any expense limitations you’re reaching in accordance with the law.
Finally, look into modern receipt software. Experiment with different options, or look for a solution that links straight to HMRC’s web servers for a rapid Self Assessment in a couple of clicks – like GoSimpleTax.
With our tool, you can photograph, scan, drop or drag the data from your receipts into a reliable, cloud-operated system. You can additionally do this all from your phone using our app – logging records on the go so you have an accurate picture of your earnings and expenditure at any point in the tax year.
There are always government resources for more information, if you’re stuck for definitions or legal requirements. There’s also a range of contact resources to discuss Self Assessment, before you start pulling it together.
Our mobile cloud tax software is a key tool for businesses, freelancers and sole traders around the UK. You can use it to record, store and add receipts to your real-time tax status. What’s more, we have a direct channel to HMRC, so you have everything you need for Making Tax Digital. Try GoSimpleTax today.
Last updated on 25th July 2019.