Allowable business expenses?
A common area where we are asked for advice, where sme business owners are confused, relates to which business expenses (and often how much can be claimed) are allowable and which are disallowable by HMRC. Small business owners can be tempted to try and claim every possible expense, and even expenses which relate to personal use.
It’s important to remember, whether you operate on a self employed sole trader basis or whether you own or control a limited company with only you as employee or just a few employees, that you must separate the business from you financially. This line can become blurred for some business owners.
Good accountants guide clients on any grey areas and help to minimise the chances of HMRC challenging or investigating expenses which have been put through a business but which may not incurred for legitimate business reasons.
We are experienced in advising clients of different sizes and types on the area of business expenses.
Company and self-employed business expenses
In general terms the answer is no. Allowable or disallowable expenses are broadly the same whether you are a sole trader paying income tax or your structure is a limited company paying corporation tax. Record keeping is also important for both. However, sole traders with relatively low turnover below around £80,000.00 only need to complete very basic expense information known as simplified expenses, when filing a self assessment return. Simplified expenses can’t be used by limited companies or business partnerships involving a limited company. There are some other practical implications where accountant advice is recommended,
What about Partnership business expenses?
Treatment of business expenses can be complex where individuals operate as a partnership. The complications can arise more as regards allocation of expenses between partners. Advice is recommended and we would be happy to assist on this area.
Allowable expenses are they really business related?
In some respects the list below of typically allowable expenses is common sense. Things are not always that straightforward though, there may be crossover areas and it’s also important to understand the different treatment, in terms of potential reduction of tax, between revenue expenses and capital expenditure. Revenue expenses are typical day to day expenses, and include :-
- Computers and laptops - apportionment between business and personal use may be required, consumables including CDs, DVD, memory cards, USB memory sticks, external hard drives, (backup) and software annual licence fee.
- Hire or purchase of protective clothing, uniform, Workwear and laundering and dry cleaning of protective clothing/ uniform.
- Journals and catalogues.
- Motoring expenses - include motorcycle and/or car, petrol, insurance, road tax,breakdown cover, insurance, Car hire, petrol allowance to shared car driver, car repairs, servicing, MOT, oils, antifreeze.
- Use of own home for business - if partially used for business based on calculations including insurance, cleaning, repairs and maintenance.
- Postage, photocopying and printing.
- Removal expenses - except if the business is moving to a larger premises in which scenario the expenses are capital expenses (see below on this).
- Research assistance and material and subscriptions to professional bodies.
- Web domain registration and hosting fees.
- Tools - hand and electric (not kept for more than 2 years).
- Stationery and printing - including inkjet cartridges and toner.
- Food and drink - everyone needs to eat and drink to live. If you are out on business there are some situations where you can claim the costs of a meal or coffee. HMRC is quite tough on only allowing expenses where an item is used wholly for business purposes and it could be argued that you would have eaten lunch or had a drink whether working or not. But essentially if you are away from your usual place of work, such as at a business meeting that you wouldn’t regularly attend, then you can claim for food and drink. There is also a subsistence allowance for overnight business trips, which is set at £5 per night for overnight stays in the UK and £10 for overseas.
- Telephone and internet.
- Travel - fares to clients, suppliers and events directly related to business such as seminars.Travel, including hotels, any cancellation fees, insurance, visas and travel for spouse/civil partner or child up to twice per year if you are away on business for trips of over 60 days.
- Use of home as office - heat and light, apportioned office and business property policies. You can claim a proportion of your household expenses such as heat and light, council tax, water rates, rent or mortgage interest for example. You must be able to show the taxman this space if they were to do an inspection.
- Warranties for business equipment bought.
- Website maintenance, domain fee and cyber-cafes.
Entertainment is not an allowable business expense
Money spent on business entertainment or gifts is not allowable except there is an allowance for Christmas party entertainment of up to a maximum of £150.00 per staff member for an annual Christmas party. Confusion can arise in this area. It’s not unlawful to spend money on entertaining prospective or existing customers or clients, you just can’t claim this as an expense, so it must come out of company or personal funds. Paying for client entertaining through a limited company may have the advantage that it saves income tax otherwise payable if funds are withdrawn first by a business owner personally.
What is Capital Expenditure? Are these expenses allowable expenses?
A deduction from your taxable income can be made in respect of your expenditure on certain assets where the key distinguishing factors which make these capital and not revenue expenses is that :-
- They are not day to day expenses
- The assets are likely to have a lifespan of more than 2 years.
There can be potential areas of crossover where an asset might be a revenue or capital expense. A good example of this might be a mobile phone. It is a day to day item but may well be useable for more than 2 years. Whether an item like this should be classified as revenue or capital for HMRC might include other factors, such as size and type of business.
The most common assets that you may purchase and that will qualify for capital allowances are as follows:-
- Car, van, motorbike, bicycle
- Computer, printer, etc
- Tools or Specialist machinery
- Office furnishings including carpets and curtains, desk, chair, filing cabinets and bookcase.
- Plant and machinery (equipment).