Do you understand rules surrounding Business Cost Expenses and fixed cost expenses and what expenditure or cost is tax deductible and what is not.?
We will initially focus on unincorporated businesses (i.e. not Limited Companies or Limited Liability Partnerships).
The general rule set by Her Majesty’s Revenue and Customs (HMRC to you and me…) is that all business cost expenses must be incurred “wholly, exclusively and necessarily for the purpose of trade”
Easiest way to stay on the right side of the law is to ask yourself two questions:
Did I buy the product or service because I need it in my business? If the answer is yes, it is a business expense.
Is the product or service used just for my business? If there is a private use element, a proportion of the cost needs to be excluded (or disallowed). For example if your mobile phone phone bill for the year is £400 and of this £150 is for personal calls, only £250 can be deducted as a business expense. However, if you have a business only mobile phone (on which you make no private calls), the full cost is deductible.
There is one further key concept to make you aware of, namely whether a business expense or cost is “Capital Expenditure” or “Revenue Expenditure”. The distinction is important because revenue expenditure is deductible in computing taxable profits; capital expenditure is not deductible, but it may qualify for capital allowances*
Capital equipment (or Assets) are higher value items that will be used by the business over several years. For a small business an asset is generally an item of equipment, referred to as “plant and machinery”, but it can also be “land and buildings”. There is no firm categorisation as it will depend on the size of the business, but as a rough guideline for small businesses, an asset can be thought of as an item of equipment costing over £100 with a working lifespan of 3 years or more.
Now let's look at a few specific scenarios & see if you know the answers! We cover the answers to the questions later on....
Are the following expenses allowable for tax purpose?
1. Bank overdraft interest?
2. Expenses incurred prior to the formation of a business?
3. Rent of business premises?
5. A purchase of a new van (not via a business lease or contract hire)?
6. An unrecoverable or “bad debt”?
7. Roof repairs on your factory?
8. Dental treatment for a salesman, necessary for performance of his work?
9. a) Travelling to and from a building site for a self-employed joiner b) Travelling to and from a building site for an employee (i.e. can employee deduct these costs?)
10. Costs of an accountant preparing a sole trader’s or partnership’s tax return
11. Repairs required for a second hand machine in order to get it into a workable condition
12. Claiming for your lunch at your normal place of work?
13. a) Parking fine for an employee b) Speeding fine for an employee?
14. Entertaining a customer?
15. Protective clothing for work?
16. Using your car for your business?
17. Accounting expenses relating to a HMRC enquiry where discrepancies were found?
18. When using your home as an office – house related costs?
19. Cost of a monthly payment for software used in a business (e.g. cloud based accounting software or Microsoft office etc.?
20. Advertising in local paper?
21. Cost of designing a website with online selling capability?
22. Tools purchased for use in the business?
23. Political Donations?
24. Pension contributions by an employer?
25. A membership to a professional organisation (e.g. member of Institute of Mechanical Engineers)?
1. Allowable. You can claim costs for the following financial charges:
bank, overdraft and credit card charges
interest on bank and business loans
hire purchase interest
alternative finance payments, eg Islamic finance
2. Allowable. You are allowed to reclaim expenses from the last seven years before starting trading (N.B. for VAT purposes however, it’s just six months). In addition you need to be confident that you’ve purchased the items specifically and wholly for your new business. Don’t claim for equipment you have purchased originally for say hobby purposes which you’ve then later decided to use in your business. As always, make sure you keep good records of your expenses, including the receipts. It is always advisable to ask your accountant for advice in these circumstances.
3. Allowable. You can claim not only for rent but also for following costs:
business and water rates
4. Disallowed. Depreciation is an accounting concept & not used to calculate taxable profits. Instead capital allowances are provided which give relief to some of the capital in use in your business
5. Disallowed. If it is a straight purchase or bought via hire purchase, this is classified as Capital Expenditure and Capital Allowances will be available. Depending on type of van purchased, Annual Investment Allowance may be available, enabling full cost to be offset against income **. If you lease your van or have a rental agreement, the whole or only part of the monthly payment is tax deductible. Speak to your accountant for further detail.
6. Allowable if you don’t use cash accounting. You can claim for amounts of money you include in your turnover but won’t ever receive (‘bad debts’). However, you can only write off these debts if you’re sure they won’t be recovered from your customer in the future. You can’t claim for:
debts not included in turnover
debts related to the disposal of fixed assets, e.g. land, buildings, machinery
bad debts that aren’t properly calculated, e.g. you can’t just estimate that your debts are equal to 5% of your turnover
7. Allowable. You can claim expenses for repairs and maintenance of business premises and equipment, but improvement and alteration are treated as capital costs. So replacing a worktop by a like-for-like one in a kitchen in a buy-to-let property would be allowable, however upgrading to granite would not be. Similarly increasing the number of kitchen cabinets etc. would also not be an allowable expenses.
8. Disallowed. Whilst an argument could be made that this treatment is necessary for the performance of the salesperson’s job, it fails the “duality principle” (when an expenditure has a dual purpose, but is not capable of being analysed into business and private use, it is not tax deductible)
9. a) Allowable, as long as IR35 legislation does not apply. b) Normally disallowed as seen as commuting. Only allowable if the workplace is regarded as a temporary workplace (if an employee goes there only to perform a task of limited duration or for a temporary purpose) ***
10. Allowable. You can claim cost of legal and financial costs such as:
hiring of accountants, solicitors, surveyors and architects for business reasons
but can’t claim legal costs of buying property and machinery. You can claim capital allowances on these costs instead ****
11.Disallowed. If the expenditure was necessary in order to put the asset into a workable condition, then cost will represent part of the acquisition cost and will be capitalised.
12. Disallowed. There are certain situations where you can claim for food and drink expenses. The rule is that you’re only allowed to claim a meal as a travel expense – but it has to be outside of your normal working routine – so, if you’re travelling to and from the same workplace every day, it’s unlikely that this will be classed as a ‘travel’ expense (also see answer 9b). Cost of food is also allowable when you are away from home on business overnight.
13. Allowable if an employer pays, or reimburses, a parking fine which is the employee’s liability (if the penalty notice was actually handed to employee at the time of the offence, or if the employee owns the car). In such circumstances a deduction may be allowed to the employer for the fine paid on behalf of the employee, but note the fine will be seen as income for the employee! But if the notice was fixed to a car owned by the employer, and the employer pays the fine as the registered owner, the fine should be disallowed in computing the employer’s taxable profit. b) Disallowed as there is a general principle that fines for breaking the law are not tax deductible.
14. Disallowed. No deduction is available for business entertainment expenses, defined by HMRC as those costs you incur when providing either subsidised or free hospitality to clients, suppliers or customers. Some examples include (but are not limited to): providing food and drink, theatre or concert tickets, sporting event tickets and use of company assets such as executive suites. These are non tax deductible for either VAT or Income Tax
15. Allowable. You can claim for uniforms, protective clothing for your work and costumes for actors and entertainers
16. Allowable. Often the easiest way is to use the “simplified expenses” route. You can claim a rate of £0.45/mile on business mileage up to 10,000 miles per tax year and £0.25/mile for business miles above this threshold. Please remember that travel between work and home is not business mileage (but also see answer to 9b above). Alternatively you can work our the cost of running your car (e.g. vehicle insurance, repairs and servicing, vehicle licence fees, breakdown cover etc.) and claim for the business element of that (you will need detailed records of your business mileage and all relevant invoices/ receipts)
17. Disallowed. Additional accountancy expenses arising out of an enquiry into the accounts information in a particular year’s return will not be allowed where the enquiry reveals discrepancies and additional liabilities for the year of enquiry, or any earlier year, which arise as a result of negligent or fraudulent conduct. Where, however, the enquiry results in no addition to profits, or an adjustment to the profits for the year of enquiry only and that adjustment does not arise as a result of negligent or fraudulent conduct, the additional accountancy expenses will be allowable
18. Allowable. You can either:
use simplified expenses, based on number of hours of business use per month:
if 25 -50 hours: £10 flat rate/month
if 51 – 100 hours: £18 flat rate/month
101 and more: £26 flat rate/month
you can claim a proportion of your actual costs incurred such as heating, electricity, Council Tax, mortgage interest or rent, insurance and internet & telephone use. You’ll need to find a reasonable method of allocating your costs, e.g. by the number of rooms you use for business or the amount of time you spend working from home. As this method has potential implications for Capital Gains Tax on your main residence, I would recommend speaking to your accountant before adopting it.
19. Allowable. These type of costs are treated as “Stationary” by HMRC, which also includes phone, mobile, fax and internet bills; postage; printing; stationary, printer ink and cartridges, as well as computer software your businesses uses for less than two years, and computer software if your business makes regular payments to renew the licence (even if you use it for more than 2 years). Claim other software for your business as capital allowances ****
20. Allowable. Other marketing costs that are allowed are advertising in newspapers or directories, bulk mail advertising (mailshots), free samples & website costs, but not entertaining clients, suppliers and customers or event hospitality
21. Disallowed. If a website itself generates income (i.e. provides the opportunity for direct online sales, or generates referrals, links or similar “click income”, advertising revenue etc.), it is capitalised as long as long as website is directly capable of generating sales at least equal in value to the amount capitalised. If it is an advertising or awareness creating site, cost can be expensed.
22. Allowable. Tools are items of equipment that are either going to be used within the business year across a number of customer jobs or for admin or office purposes. They are generally lower in value (exact cut-off will depend on the size of your business and could be in the £100 – £2,000 range).
23. Disallowed. Political donations by individuals are not tax-deductible in the UK. Rules for political donations via companies are complex and need an in-depth discussion with your accountant.
24. Allowable. Staff expenses such as salaries and wages (only tax deductible if remuneration is commensurate with the work & money is actually paid; so a salary to an employer’s wife who does not perform any duties, will be disallowed), bonuses, pensions, benefits, agency fees and employer’s National Insurance contributions are all tax deductible. You can’t claim for carers or domestic help, e.g. nannies
25. Allowable. You can claim subscription for trade body or professional organisation membership if related to your business. You can also claim for trade or professional journals.
Business expenses can be a complex area so if you are in any doubt, speak to us, so we can help you make the right decision.
* Currently up to £200,000 a year of capital expenditure on plant and machinery (includes certain vans but not cars) qualifies for the annual investment allowance and is deductible in full. Capital expenditure that is over this Annual Allowance limit, and also the cost of buying most cars, qualifies for writing down allowances at 8% or 18%.
** Get in touch with your accountant to ensure your van qualifies before buying it.
*** Extensive rules are in place but in practice an employee is no longer eligible for tax relief on their travel to a temporary workplace from the moment that they or their employer expect or intend that they will work there for more than 24 months
**** if you don’t use “cash accounting” method
The information contained in this tutorial is for general information purposes only. The information is provided by Tulip Thistle Accountancy and while we endeavour to keep the information up to date and correct, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to the tutorial or the information, products, services, or related graphics contained on the website for any purpose. Any reliance you place on such information is therefore strictly at your own risk.In no event will we be liable for any loss or damage including without limitation, indirect or consequential loss or damage, or any loss or damage whatsoever arising from loss of data or profits arising out of, or in connection with, the use of this tutorial and website.