Setting up a business is both exciting and worrying. There’s so much to do and the topic of tax deductible expenses for business might not even be on the radar! However, no doubt you want to optimise your tax position whilst making sure you stay on the right side of HM Revenue and Customs (HMRC).
It’s always important to make sure that you claim all eligible expenses. Therefore, let’s look at what can be considered a business expense.
Are all expenses allowed for tax?
It can be challenging to determine which expenses are tax deductible when you are in business. Not everything you spend will be allowable for tax.
For an expense to be allowable for tax, the first question is whether it is capital or revenue.
Revenue expenditure is deductible against profits. Capital expenditure, on the other hand, occurs when it is an asset, and you receive tax relief over the life of the asset.
But let’s say an expense is of a revenue nature, can you claim for everything? Are all expenses tax deductible expenses for your business?
Well, it depends because an expense has to be “wholly and exclusively” for your business. Which means it must be primarily for business.
What is a business expense?
Always question every expense: Was it purely for the business, or was there another underlying motive?
There are some expenses that you will incur as a business, but they will not be tax-deductible for your business, such as client entertainment. While certain other expenses may not appear relevant at first glance they can be.
Whilst this is not an exhaustive list since it depends on your industry and how you operate, these are common non-direct expenses that you can claim for:
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Office expenses
These are generally expenses to make sure the office functions as it is intended to. For a fully functional office, you need to spend money on stationery, postage, ink, and electricals including telephones.
Items such as computers, screens, laptops and printers tend to be of a capital nature, but are obviously still allowable business costs.
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Mobile phones
Many people currently own a mobile phone, and a significant amount of business is conducted using mobile phones. You are permitted to claim expenses for a mobile phone, but there is a condition: the phone contract must be under the name of the business.
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Travel expenses
Any business travel expenses are tax deductible expenses for your business. But remember travel between work and home is never a business expense.
Due to the current trend, with many of us working from home, it’s causing some confusion. Here’s a guide for travel expenses when working from home.
The common travel expenses you can claim are:
- Train or bus fares but just keep proof of purchase like a receipt
- Subsistence including meals and drinks when the trips are are “wholly and exclusively” for the business. Again you should keep receipts or you could opt for the scale rate (see more information below).
- Hotel rooms and meals for overnight trips. You can either operate a scale rate system for frequent travel or reimbursement of full expenses. Here’s more information.
- If you provide a company car you can claim for the hire cost of the car and all the related maintenance plus fuel and insurance. However, the employee of the car will have a taxable benefit unless it is a pool car
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Entertainment including trivial benefits for employees
Generally speaking, you can claim back tax relief on the costs relating to entertaining your employees. However, there is a limit. You can spend up to £150 (including VAT) per head so long as the events are open to everyone.
The exemption is per tax year and if it is not used it is lost. It can include accommodation, transport as well as food and drinks. If you exceed the £150 limit then things can get complicated. The limit is for multiple events but let’s say you spend £400 per employee in a tax year, it is not as simple as deducting £150 from the total spend and taxing the rest.
In this scenario, you would look at all the events and exclude any events which when added together come to £150 or less per employee. The remainder you cannot get tax relief on and it is taxable. What’s more, it is subject to tax for the employee too unless you offer to pay the tax for them.
Trivial benefits is a less used allowance. The rules can be used to take your employees out for a meal to the pub or you could give them a gift.
What’s important is that it is unexpected and the limit is £50 (including VAT) per event but it cannot be cash. If you are a director of a company you can’t receive more than £300 (including VAT) in any given tax year so that allows you six events a year.
You find out more about these rules here
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Legal and Financial expenses
Generally speaking, all fees paid to accountants are tax deductible. The only time you can’t is if it relates to your personal tax affairs which is not relevant to your business.
With regards to legal expenses, anything relating to buying a property you can’t claim at this is considered capital expense otherwise you are fine.
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Subscriptions
If any of your employees belong to a professional body and that institution is relevant to their job, then it is a tax-allowable expense. You can pay for their professional bodies and get tax relief.
The only proviso is the professional body must be approved by HMRC which it would be for most professions.
The bonus is any payment for employees does not constitute a taxable benefit so a win-win situation.
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Use of home
Depending on what work you do, you may be able to claim expenses back for using your home. You can claim £6 per week if your employer does not have an office or you live too far away. If you are a director and your home is your office, this would apply to you.
If your employees are working some of the time from home as a perk of the job, they will not be able to make the claim.
The alternative way is to claim for a percentage of the expense spent on the business. This would be items like phone calls and utilities but not rent, mortgage payments or internet.
However, if you are self-employed you will be entitled to a more generous relief. Assuming you don’t have an office you will be able to claim a percentage of your mortgage interest, broadband and even maintenance of the property.
Here’s further HMRC guidance on what expenses you can expect to claim if you are self-employed.
Finally, most of you will know this but remember if you break the law, any associated fines and penalties are not tax-deductible expenses for your business. Common examples are fines for not filing your VAT Return or speeding and parking fines.
We understand that at times this topic can be overwhelming. When we handle your accounts, we are committed to ensuring that we maximise your benefits and claim all that you are entitled to.
It is always worthwhile to know that if an expense is a legitimate business expense, you will be eligible for tax relief. However, If you want to discuss this topic in depth don’t hesitate to contact your manager at Myers Clark. If you are not yet working with us, have a look at how we work.