What Expenses Can UK Marketing Agencies Claim?

Rayhaan Moughal

09.09.2024

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Running a marketing agency in the UK comes with its fair share of costs. From employee salaries to software subscriptions, office space, and even business travel, you could incur a wide range of expenses throughout the year.

As an agency owner, you should be aware of all of these, especially as they can help you reduce your tax bill. This is through tax deductions, which are allowable expenses that can be deducted from your profits to calculate your tax.

Understanding Tax Deductions for Agencies

Tax deductions for marketing agencies are costs that you can subtract from your total income to reduce the amount of tax you pay. These deductions are specific to business-related expenses that are necessary to run your agency. By claiming these deductions, you can lower your taxable income, which means you will owe less in taxes.

For example, if you're creating content for your agency, any money you spend on business-related activities can be claimed as a deduction such as buying new camera equipment, purchasing software for editing videos, or even travel expenses for attending shoots.

By deducting these costs, you will reduce your taxable profit, ultimately paying less in tax.

What Counts as a Business Expense for Marketing Agencies

A business expense for a marketing agency is any cost that is directly related to the operation of the agency. This can include a wide range of costs such as employee salaries, office rent, and software subscriptions.

Other common business expenses for marketing agencies may include costs for advertising, client entertainment, and travel expenses for meetings or conferences. The key is that these expenses must be necessary for running the business and generating income.

By listing these costs as business expenses, an agency can reduce its taxable income, which means they pay less tax. This is why it’s crucial for agency owners to keep thorough records of all their business-related expenditures. Properly documenting and categorising these expenses can have a big cash flow impact.

How Are Agency Expenses Calculated

Calculating agency expenses starts with keeping detailed records of all costs related to running the business. Each expense needs to be recorded and categorised correctly to ensure it is accounted for accurately. When tax time rolls around, these expenses will help reduce the taxable profit, meaning the agency pays less in taxes.

Consider an example where an agency spends £10,000 on office rent, £5,000 on software, and £3,000 on travel for client meetings in a year:

Expenses:

£10,000 on office rent
£5,000 on software
£3,000 on travel for client meetings
Total expenses: £18,000

Profit before expenses: £50,000

Taxable profit after deducting expenses: £32,000 (£50,000 - £18,000)

Tax due on £32,000 at 19%: £6,080

If no expenses were claimed:

Taxable profit: £50,000
Tax due on £50,000 at 19%: £9,500

Difference in tax due:

With expenses claimed: £6,080
Without expenses claimed: £9,500
Tax savings by claiming expenses: £3,420 (£9,500 - £6,080)

If the agency made £50,000 revenue, then the taxable profit would be £32,000 after deducting the £18,000 in expenses, resulting in £6,080 of tax.

If no expenses were claimed, the agency would be taxed on the full £50,000, leading to a higher tax bill of £9,500

What Expenses Can Marketing Agencies Deduct

Marketing agencies can deduct their expenses from tax bills when these costs are considered "wholly and exclusively" for business use. This means that the expense must be necessary for running the agency.

For instance, costs like:

Salaries for employees
Freelancer costs
Software subscriptions
CRM, eg Hubspot or HighLevel
Slack
Office rent
Advertising spend
Travel costs

Can all be claimed as business costs. It's vital to keep thorough records of these expenses to ensure they can be easily tracked and justified if questioned by tax authorities.

When it comes to preparing your tax filings, these costs should be listed in the appropriate sections to reflect the financial costs of running the agency. The proof needed includes receipts, bank statements, and invoices. Keeping organised records is crucial as HMRC may request evidence to support your claims. Using software like Xero will make keeping track of receipts and costs simple without needing to hold on to paper receipts.

Can Agencies Claim Expenses for Working from Home?

Marketing agencies in the UK can claim expenses for a home office. For example, if you have a specific room that you use as an office, you can claim a portion of your household running costs, in some cases that includes rent, mortgage interest, utility bills, and internet costs. The key is that the space must be used solely for business purposes. If you use a room for both personal and business use, you need to calculate the percentage of time it's used for work and only claim that portion.

HMRC may ask for evidence, such as utility bills and a floor plan showing the dedicated office space and therefore it’s important to be accurate and honest in your claims. Claiming too much can lead to penalties, while not claiming enough means missing out on tax savings. Keeping track of these expenses can be easier with dedicated software or even a simple spreadsheet, as long as it is accurate and up-to-date.

Non-Allowable Expenses for Tax Deductions

Not every expense a marketing agency incurs will be eligible for a tax deduction. Some costs, known as non-allowable expenses, cannot be deducted from your taxable profit. Personal expenses, for example, are non-allowable.

This includes costs like groceries, clothing, or travel for holidays. Non-business-related entertainment, such as a dinner out with friends, also falls into this category. The taxman is strict about separating personal and business costs, so it's important to keep accurate records.

Claiming non-allowable expenses can lead to serious implications. If HMRC audits your accounts and finds that you’ve included non-allowable expenses, you could face penalties. This might mean paying back the tax you owe, plus any fines or interest charges. In some cases, it could even lead to a more thorough investigation of your business finances. To avoid these problems, always check if an expense is allowable before including it in your tax return. If in doubt, seek professional advice.

Consequences of Incorrect Expense Claims

If you claim expenses that are not allowable, HMRC may reject your entire tax return. This can result in penalties, fines, or even more severe legal actions. Additionally, if you unintentionally make a mistake, you could still face penalties, though they might be less severe if you prove there was no intent to defraud.

Incorrectly claiming expenses can also damage your agency's reputation. Being flagged for incorrect claims can lead to more frequent audits and scrutiny from HMRC in the future. This added stress and oversight can take time away from running your business and could potentially harm relationships with clients if they become aware of your tax issues. Therefore, it is crucial to keep accurate records and fully understand which expenses are allowable, ensuring that your tax submissions are correct and compliant.

Conclusion

In summary, understanding and claiming the right expenses can have a significant impact on the financial health of a UK marketing agency. By identifying what counts as allowable expenses, agency owners can make sure they aren't missing out on possible tax deductions. This not only helps in reducing the overall tax bill but also ensures that the agency operates within the legal framework set by HMRC.

It's crucial to seek specialist advice if you have any doubts about what you can or cannot claim. Expert guidance can help you navigate the complexities of tax laws, making sure your agency stays compliant while maximising potential savings. The right advice can also prevent costly mistakes, ensuring your expense claims are accurate and legitimate.

Get In Touch

Whilst it may seem straightforward to complete your tax returns on your own, if you want to make sure you are claiming everything you possibly can then it pays to consult an accountant such as Sidekick.

To find out whether you are maximising your expenses and keeping as much of your profit as you’re entitled to, book a call with us, and we’d be happy to guide you - whether you are making the claim yourself, or if you’d like us to do it on your behalf.