You might be running your business as a Self-Employed person, a Sole Trader or a Limited Company, but broadly speaking the expenses you’re allowed to charge for tax purposes against your business are the same.
Now, try and erase all thoughts of Edwina and Patsy’s business expenses, which we all know comprised of their taxi after shopping at Fenwicks, the ‘bolly darling’ at lunch, the lunch itself, and probably the full ‘uniform’ right from the Pucci headscarf down to the Christian Lacroix shoes! They did not set a good example!
The golden and clear rule is that only costs which are ‘wholly, exclusively and necessary in the course of running your business’ can be charged to your business. If you use this rule whenever you have a query of what you can and cannot charge you won’t go far wrong. This excludes Capital Expenditure such as computers, machinery etc. We’ll come onto that later.
Typical Business Expenses that you can claim:
- Employee salaries and National Insurance and Pension costs
- Travel and hotel costs including mileage allowances for use of personal cars
- Stationery, postage and printing
- Most Legal Costs
- Marketing and Advertising costs.
- Office rent and business rates
- Telephone and internet costs (including company mobile phones)
- Computer software
- Bank charges
- Temporary staff
- Product costs ie materials, tools etc
- Training courses
- Professional fees – such as an accountant, bookkeeper, cleaners etc
Business Expenses that you can claim, that might surprise you if you work from home and some you might forget:
- A handy thing to know is that you can claim for items bought before you legally registered as self-employed. These are known as ‘pre-trade expenses’, and the general rule of thumb is that you can claim for anything you bought within the last seven years that would qualify as tax-deductible had you bought them while trading.
- Remember that you wouldn’t be able to do your job if the lights weren’t on and your house felt arctic. As a rough guide, you can firstly figure out how much of your time is spent doing business – to equate how long, each day, your business is benefitting from the usage of electricity and/or gas. Then, you’ll need to look at your house. If you’re heating your whole house, but you only work from one room, you can only claim one room’s worth of utilities. Do a few sums and you’ve saved a little money thanks to your everyday bills.
- Your PR. Do you go to networking evenings? Run events with the purpose of marketing your business? Keep every receipt, tot up every expenditure and note every lunch, it’s all tax deductible. Remember Eddie – don’t blur the line with business entertainment, however. This isn’t covered unless it’s been explicitly stated by HMRC – for example, the Annual Christmas Party is tax deductible.
- If you work from home, you can claim a proportion of your mortgage interest as a business expense, again calculating how much of the property you use for business purposes. The same thing goes for renters, if you’re renting from a landlord, a proportion of that rent can be claimed if you can work out what is used solely for business purposes. Some repair and maintenance costs can be expensed, for example, if you renovate your home office. If, however, you’re deciding to rip out your kitchen or add an extension, this kind of thing would not be covered!
Typical Business Expenses that you cannot claim:
- Business entertaining – including Friday night drinks, unless you are networking etc.
- Legal fees relating to leases, company formation etc
- Childcare (can you believe it, this needs to change!)
- Fines and penalties e.g. speeding tickets
- Charitable contributions
- Gym membership
- Beauty appointments – unless specifically for the purposes of your events (see above)
So what about claiming the business’s capital expenditure?
Capital Expenditure, to be clear, is for accounting purposes, the depreciation of XXXX over its useful life and charged to your P&L. For tax purposes, depreciation is not classified as an allowable business expense, but instead the law allows you to claim capital allowances which can be quite favourable for business.
Most importantly for the tax year 2017-18 businesses can claim an Annual Investment Allowance of up to £200,000 on capital expenditure on plant and machinery purchases (excluding cars) in that year, which can then be offset against taxable profits.
For example – Business A makes £50,000 taxable profit in the year, but during that year they bought plant and machinery of £25,000. The business can then claim 100% of that £25,000 against his profits, thus reducing his taxable profits for the year down to £25,000.
- Use an accountant to help you with your annual accounts and tax – that’s why they went and learnt all this stuff, so you didn’t have to!
- Keep receipts and invoices to prove that the business expenses are allowable for tax.
- Keep good records!
- Remember the golden rule.