Here’s a tricky question about the very practical issue of whether you can claim payments to your driver as a business expense, and if so what records should you keep.
Hi there, I’m an escort working mainly for an agency. I’m declared self employed and trying to fill in my tax return for last year. Can I claim drivers’ fees as expenses, even though I have no receipts (am unlikely to get them) and am doubtful that most of the drivers are registered self employed? If not is there a way to get round this? as obviously a large chunk of my turnover is paid to drivers and without taking it off as an expense my tax liability will be ridiculous.
Let’s tackle this question in stages.
First of all, payments to drivers are allowable business expenses because they are ‘wholly and exclusively incurred’ for business purposes. The driver may simply provide a taxi service, but frequently he can be part of an escort’s security arrangements. The driver may be arranged by the escort herself, or could be provided by the agency. In most cases an escort working through an agency will be paid by her client and then have to pay her driver as well as paying a percentage to the agency. The tax position is that the whole amount received from the client is treated as the escort’s income, while the payments to the agency and the driver are allowable business expenses.
The next point to make is that the law requires you to keep records that give you all the information you need to fill in your Tax Return form. The need to keep records applies not just to expenses, but also to income. For any cash based business that can cause problems. You and your clients may share many things during the course of an appointment, but an invoice or receipt is not likely to be one of them. The problems are compounded if some of your expenses are paid out in cash without a proper trail of paperwork.
The first things you should do are to get as much paperwork as you can and then record all the details of your income and expenses as you go along, including writing down details of income or expenses that are not supported by paperwork. Agencies vary in whether or not they give you a receipt for their agency fee. If they do then try asking them to put on the receipt that it is your responsibility to pay the driver, or even better get them to pay the driver for you. But at the very least your records need to show where you went to for an outcall and how much you paid to your driver. And you ought to record the driver’s name, even if it just ‘Dave’.
HMRC do recognise that you may not get receipts for cash expenditure. Their Quick Guide to Keeping Records says this
If you claim business expenses, you’ll need to keep the necessary records to back them up. For example, if you use part of your home for work, you will need to keep sufficient records to show the proportion of heating and lighting costs that relate to your business and your private use.
Sometimes you may not get evidence, such as a receipt, for cash expenses, especially where the amounts are small. If this happens, make a brief note as soon as you can of the amount you spent, when you spent it and what it was for. We don’t expect you to keep photocopies of bills, although you may find them useful.
If HMRC decide to investigate your Tax Return they can ask you to produce the records that you used to help you fill in the form. Expenses will not be disallowed simply because you cannot produce receipts to back them up. It’s not possible to give a cast-iron answer but you will have a much stronger case if the expenditure you have claimed for makes sense – so payments to drivers should correspond with specific bookings.
As far as the driver is concerned anything you pay him is taxable – unless he is family or a friend and you agree it is a gift. He is liable to pay tax on this income even if you choose not to claim it as a business expense. And you are not responsible for ensuring he is registered as self-employed or checking whether he intends to declare this income, any more than your clients are responsible for ensuring you pay tax, or I am responsible for ensuring my window cleaner pays tax on all his income. If your driver does decide to declare the income he receives from you he can claim a deduction for petrol and running costs – the easiest way for him to do that is to use the HMRC approved rate of 45p per mile. So he will only need to declare the income and pay tax if what you pay him is more than 45p per mile.
There is one other possibility you might want to consider. As a self-employed businesswoman you are entitled to claim tax relief for using your car. It doesn’t matter whether you own the car, or just have use of it. So instead of claiming for the actual cost of the driver and his car you may be able to claim for mileage at 45p per mile. If that looks like a possible option I would recommend consulting an accountant who can advise you based on your precise circumstances.