We are often asked “what expenses can I deduct in my business for tax purposes?” This is a fair question, and one that all business owners should be able to answer.
It is impossible to list the deductible expenses, as there are unlimited possible types of expense. Deductible for tax purposes often depends more on context rather than what the actual expense is. The following guidelines will help you understand what can be deducted and what cannot be deducted.
- It is important to keep a record of expenditure. These records must be kept until the fifth anniversary of the 31 January following the tax year (or, in the case of companies, six years after end of the accounting period).
- If money has been spent on an expense, the expense can be claimed even if you don’t have a receipt. It is much better if you do have a receipt as this will avoid any potential argument that you incurred the expense.
- Only business expenses can be claimed. If a singular expense item is partly business and partly private then it cannot be claimed at all. Examples of this include reading glasses, food, clothing, medical costs.
- If a cost is for more than one unit of item, for example a telephone bill is for multiple calls and a fuel bill is for multiple units of fuel, then the expense could be split between business and private and a reasonable proportion claimed.
- Costs relating to capital items such as legal costs in purchasing a new property cannot be claimed. However physical capital items such as computers or equipment can usually reduce tax liabilities through a capital allowance claim.
- Payments to relatives, such as spouse’s wages, can only be a business expense if the person does work for the money and is paid at a commercial rate.
- Business entertainment cannot be claimed as a deduction against profits. Staff entertainment can be claimed, although this will often create a personal tax liability for the employee unless the entertainment falls under the annual parties rules.
- Use of home as office claims can be made for any reasonable amount. This can be a proportion of mortgage interest or rent, council tax, water rates, gas, electricity and insurance. The proportion must be reasonable in the context of the number of hours worked at home and the space taken up at home. You should not dedicate any room entirely to business. For directors of companies, the same claim can me made against the company which then has a rent charge. The director then declares the rent and the costs (potentially matching) on their personal tax return.
- Generally travel from home to work is not a deductible expense. Travel costs can be claimed for the cost of travel from office (including from home if home is place of work) to clients, suppliers and business meeting. Where travel costs can be claimed, so can subsistence (food and drink) and accommodation associated with the travel be claimed.
- You cannot claim back for expenses which have not been incurred, only for actual expenditure. If, for example, you charge a customer £1,000 + £100 travel related costs, and incur £50 actual travel costs.
- Pension contributions reduce tax. For self employed individuals tax relief is given “at source” for basic rate tax, and through the tax computation for any higher or additional rate tax due.
These rules apply to businesses, i.e. self employed and companies. There are different rules applying to employees.
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