Business Expenses – don’t we love them!
In fact, many people love them so much because they think they get something for free. That’s a big mistake because business expenses still come out of the business’ pocket. Neither are they taken ‘off tax.’ Rather, it’s taxable (gross) income and revenue that are reduced by the amount of the expenses. Tax is then calculated on the smaller final amount.
Another general confusion seems to persist around two different types of expenditure, Capital Expenditure and Revenue Expenditure. Capital expenditure, such as equipment, computers, machinery, fixtures and fittings, is not a deductible business expense but is treated separately as Capital Allowance as it usually involves acquiring or creating an’ asset of enduring benefit.’ Revenue expenditure, on the other hand, reflects the day-to-day running costs of the business.
This article will only deal with Revenue Expenditure.
Whatever your status – sole trader, director, employee – some rules governing deductible business expenses hold for everyone.
- You must keep expense receipts. These records have to be kept for five years. To be precise, they should be kept to the 31st of January five years after the end of your tax year. Companies must keep records for six years after the end of their accounting period.Certain exceptions to this rule, such as expense dispensation schemes for umbrella companies, allow contractors to claim without providing receipts.
- Expenses must be incurred ‘wholly and exclusively for the purpose of the trade, profession or vocation.’ For company owners who claim as employees (directors) the definition becomes tighter: Expenses must be incurred ‘wholly, exclusively and necessarily in the performance of their duties.’
- For things that have dual use, personal and business, such as a car run by the business, the share of personal use has to be calculated and removed from expenses. If it is not possible to calculate such a share, then no deduction is allowed.
HMRC has specific guidance on what is deductible (allowable). Keeping to these rules will help avoid fines and penalties. Rules for businesses and employees differ.
Here are the main categories for deductible business expenses:
WORKING FROM HOME
If you work from home you can claim tax relief for a share of the costs of running your home.
From 2012-13 onwards, employees can claim £4/week, or £18/month if they are paid monthly, without records. Records must be provided for sums above £4/week.
Items that are for dual use, business and private, and regular household running costs like mortgage or council tax are not allowed.
If you are self employed, your claim should be based on the share in the total of either the number of rooms or the floor area used for work. The following items can be included in the calculation of this share:
- General maintenance
- Council tax
- Water rates
- Mortgage interest
If you operate through a company, you can charge your company rent on a similar basis but it is best to draw up a simple rental agreement.
TRAVEL, BUSINESS MILEAGE AND FUEL
Travel for business purposes is an allowable business expense. Travel and accommodation on business trips and between different places of work can be claimed. This, however, does not include the cost of regular travel between home and workplace.
Travel expenses include:
- public transport fares
- hotel accommodation
- congestion charges
- parking fees
- business phone calls, fax or photocopying costs
As an employee using your own car or other vehicle, you can claim tax relief up to the maximum allowance per mile if your employer does not pay in full or not at all. You cannot claim if your employer pays the maximum allowance.
If you are self employed you can claim for the running costs of a car or other vehicle – petrol, car tax, insurance, repairs and servicing – used for business travel. If you also use it privately you have to calculate and deduct the share of private use. You need to keep receipts and a log showing at least a representative period of business use. You cannot claim for the cost of buying a car or other vehicle as business expenses. This could qualify for capital allowance.
FOOD AND DRINK
Entertaining is explicitly not allowed even if the guests are strictly business contacts.
Meals on business trips, but not snacks, are allowable as long as the trip is not part of a normal pattern such as commuting to work.
Employees on PAYE can claim for subsistence when they are obliged to travel in the course of their work.
Bosses can treat their staff within specified limits as long as the staff does not invoice for their work. As long as this is covered by the annual parties rule, it will not create tax liabilities for employees.
Ordinary clothes that could be worn when not working are not an allowable business expense.
The two exceptions are protective clothing, such as overalls, gloves, boots, helmets, and clothing with a business logo.
Tools that are necessary for work are allowable as are the cost of maintaining and replacing these tools.
FINES AND PENALTIES
Fines and penalties are not normally allowed as business expenses as you cannot derive tax benefits from illegal activities. However, according to a recent case, a penalty could be allowed if it was connected with its trade and was incurred wholly and exclusively for the purposes of its trade.
PROFESSIONAL FEES AND SUBSCRIPTIONS
For businesses, trade or professional journals, reference books and subscriptions are deductible business expenses. So are accountancy, legal and other professional fees and professional indemnity insurance premiums.
Certain statutory fees or contributions paid by employees out of their earnings are allowable if they are necessary for their employment. Annual subscriptions are allowable for HMRC approved organisations (the list of approved organisations is here ).
Capital expenditure, such as equipment, computers, machinery, fixtures and fittings, obviously is a business expense. For tax purposes, however, it is not allowed as a deductible business expense for day-to-day running of the business. Instead, it is applied separately as Capital Allowances, which is a depreciation charge calculated for tax purposes.
Employees can only get capital allowances for items they have to use for their work and that are not provided by their employer. Small items, such as tools that are necessary for the job can be claimed as business expenses and qualify for 100 percent tax relief.
SALARIES AND BENEFITS
If you are self-employed, you can claim for all the elements that make up the cost of employing staff:
- Wages and redundancy payments
- Employers’ NI contributions
- Insurance and pension benefits
- Employee childcare provision
- Training cost
You cannot claim any payments made to yourself (wages, salary, NI contributions, and pension contributions).
If you employ family members, payments to them are only allowed as business expense if they actually work and are paid at a commercial rate.
This article is only general advice on deductible business expenses. It is prudent to seek qualified professional advice specific to your circumstances if you are not sure whether an expense can be claimed. Contact us at any time to discuss any question that you may have. We’ll be happy to help.