HMRC has published a briefing note on the simplified expenses rules which have been brought in as part of an initiative to provide a simpler and easier-to-follow approach to income tax for small businesses say Harris & Co chartered accountants Northampton.
Under the new rules, non-statutory business mileage deductions using the approved mileage allowance payments rates have been withdrawn, as have agreements for board and lodging private-use adjustments.
Instead, firms can now calculate allowable expenditure on vehicles using a flat rate based on mileage. This means that actual costs incurred do not need to be recorded, nor do capital allowances need to be calculated.
Businesses can choose to use the flat rates. However, once the flat rate has been used in relation to a particular vehicle, this method of calculation must continue to be used for as long as the vehicle remains in the business. If capital allowances have already been claimed in respect of a particular vehicle, then the flat rate cannot be claimed in respect of that vehicle.
Where the "simplified expenses" rules are not used, allowable expenses and capital allowances are calculated in the normal way unless the business has opted to use the cash basis, in which case capital allowances are only used for cars.
HMRC is also withdrawing the "board and lodging" agreements with small hotel and guest house businesses for private use adjustments.
Now, where such premises are used partly as a home, businesses can choose under the new rules to make a private-use adjustment based on a flat rate amount. The amount is subtracted from actual expenses incurred, to arrive at the amount deductible as a business expense. Only premises used mainly for the purposes of carrying on a trade will qualify.
The flat rate amount is based on how many people, including children, use the premises as a private home each month or part of a month. It includes all household goods and services, food and non-alcoholic drinks and utilities, but not mortgage interest, rent of the premises, council tax or rates. HMRC says a reasonable apportionment of the expenses should be made based on the extent of the private occupation of the premises.
Board and lodging agreements will be withdrawn from 2013/14. As transitional step, a business with an agreement for 2012/13 can use it for the following year as an alternative to the simplified expenses method or the normal statutory basis. This option is only available for the 2013/14 tax year, and HMRC says it is designed to help businesses currently using these agreements who may need more time to prepare for the change, particularly in cases where the business opts not to use the "simplified expenses" method and needs to maintain full records.
The simplified expenses rules, which are contained in Revenue & Customs Brief 14/13, also allow sole traders and partnerships to claim a flat rate deduction in respect of ‘use of home for business’, as an alternative method to recording actual expenditure and apportioning the business element. The monthly flat rate includes household running costs such as heat, light, power, telephone and broadband.
A business that decides against using the rules will need to use the normal statutory method instead. In such cases where private use of telephone or internet costs does not form a significant proportion of service use, HMRC will accept that the full amount of expenditure can be claimed.