Linda Eales of Peninsula Taxwise takes a look at the criteria for business expenses, including what you can and cannot claim for as well as providing practical advice that will help you when completing your return. Peninsula TaxWise provides an insurance to protect you from costly HM Revenue & Customs tax investigations and also provides a range of services to advise and support businesses. For more information please contact Peninsula Taxwise on 01455 852555.
No-one enjoys filling in their tax return and as much as media campaigns have tried to make it seem a simple task, there are always doubts for business owners as to what they can and can’t claim as a business expense. So how do you know what a business expense is? The first thing that you must be aware of is that a business expenses must be wholly and exclusively for the purpose of trade and secondly that they must be of a revenue nature and not of a capital nature. Revenue expenditure is an allowable deduction when calculating your profits unless it is specifically excluded; an example of which would be any business entertaining. Depending on the status of your business, there are some things that you can and can not claim as business expenses and some of which are outlined below.
Sole traders and Partnership
You cannot deduct an expense that is incurred for both business and private purposes, for example clothing purchased for business use but also used for private purposes. Nevertheless some mixed expenses may be incurred wholly and exclusively for the purpose of the trade and be deductible expenses, such as business telephone calls from your home telephone and also business premises expenses interlinked with living accommodation expenses.
For the business element of such expenses to be allowable there needs to develop an accurate way to separate the business from the private and records of any divisions should be kept. Any meals that you buy away from the business are not automatically accepted an a business expense as HMRC do not regard this solely for business purposes, however it is worth noting that those who travel regularly with their work and those who make occasional business trips are entitled to claim for reasonable expenses incurred. Where overnight stays are required for business, reasonable costs of accommodation and food are allowed and it is strongly recommended that receipts are retained.
Car mileage can also be mixed between private and business usage and it is suggested that records are maintained to show the accurate business element.
You should ensure that any salaries paid to part time directors or their family members should not be excessive as HMRC could disallow such expenses on the grounds that they are not wholly and exclusive for the business. Payments of any personal debts of directors/shareholders should be entered on a P11d and if such a payment is not treated properly, HMRC will treat the amount as a loan which should be paid back to the company. The loan is not treated as an allowable expense and has tax consequences for both the director and the company.
A capital expense is not deductible in calculating your profits although you may be able to claim capital allowances on certain items purchased. A capital expense is officially described as a payment made “not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of the tradeâ€. One persons stock could be another persons fixed assets. For example if your business uses computers these are capital items but if your business builds and sells computers the computers are trading stock and the cost will be taken into account in calculating your profits.
Hopefully, this should help shed some light onto what can and can not be claimed. Obviously, any particular queries regarding your tax return should be talked over with experts and Peninsula TaxWise are always on hand to help, just give us a call on 01455 852555. Finally, there are also a few other examples of allowable business expenses that you can look at when filing your tax return, these are:- Wages
- Counselling services for redundant employees
- Plant Hire
- Small Tools
- Business Rent and Rates
- Use of Home as an Office (including any business telephone)
- Business Travel Costs
- Business Accountancy Fees,
- Bad Debts
- Non -recoverable VAT relating to allowable expenses i.e. where turnover is below the VAT threshold and repairs.