A fundamental rule of business is that profit equals income minus business expenditure and because businesses are only taxed on their profits, ensuring that all allowable expenses are accounted for makes good business sense. But which expenses are allowable by HMRC and which must be shouldered by the business?
Whatever the expense, HMRC rules state that the expense must be purely business related – no expenses for personal or non-business use are allowed by HMRC. Redfern states “HMRC use the term ‘wholly and exclusively’ to define what is allowed as a business expense – whatever the expense item, it can only be deducted if it has been wholly and exclusively used in the running of your business. You may be required to provide evidence that the expense has been incurred and that it was solely for business use so good record-keeping is essential. Where it comes to expenses on costs which are dual-purpose, perhaps you use a room in your house as a business office or you sometimes use your business vehicle for personal trips, you need to be able to clearly show the split between personal and business use and only business use will be allowable as a deductible expense”. Business records can be kept electronically or as paper copies and should be kept for at least 6 years in case HMRC request them.
Expenses incurred in the running of your business are generally allowable. The costs of running an office, transport and travel, purchasing goods to sell or the raw materials which will be manufactured into a product and advertising costs are generally all deductible expenses. Depending on the business, staff costs can make up a large proportion of deductible business expense with salaries, National Insurance contributions, pension contributions and benefits all adding up. However, there are a few exceptions. Redfern comments “While most expenses will be deductible from profits, there are a few expenses which HMRC will not allow. Client hospitality is not an allowable expense, whether you are entertaining clients, customers or suppliers. You also can’t deduct the cost of any driving or parking fines you might pick up, even if they were incurred while on business travel. Any expense incurred for your own use won’t be allowed, and that includes the cost of commuting to your usual premises – normal commuting costs are not allowable as they are considered to be part and parcel of the normal cost of living we all encounter, just like the cost of providing your own meals or civilian, non-uniform, clothing”.
Often forgotten areas of allowable expense include non-physical business expenses such as professional fees, banking and credit charges, insurance and interest charges. Redfern explains “Not only can you deduct the costs of professional fees, such as the fees you may pay to an accountant or solicitor, you are also able to deduct the cost of any bank charges, credit card charges, leasing payments and interest charges on any financing arrangements that your business requires to function. However there are a few notable exceptions – you can’t deduct the legal costs of purchasing property nor any costs incurred in settling tax disputes or legal fees in criminal cases. When looking at bank charges and interest payments, it is only the interest that can be deducted from finance payments – the actual repayment of the finance is not allowable”. Other miscellaneous allowable expenses include professional journals and trade organisation and union subscriptions, although subscriptions to political parties are non-deductible.
However, large business purchases like property, vehicles and business equipment and assets are not deductible as allowable expenses. This includes the cost of renovating or improving already-held assets. Redfern states “Business assets are generally non-deductible, except in certain circumstances for sole traders using cash basis accounting. Rather, these business expenses are classed as capital expenditure and a different method of tax relief is available to account for these costs and any depreciation of business assets using capital allowances”.