This is a very common question asked by clients. It isn't always clear which expenses are allowable (can be claimed) against the income of a business. The general rule is that an expense is allowable if it is incurred 'wholly and exclusively' for the purpose of carrying on the trade of the business.
Allowable Expenses
1) Mileage
You can claim 40p mile (up to 10,000 miles and then 25p/mile thereafter) as an expense claimed for business travel made in your own car. This is deemed to cover the petrol and wear and tear costs of running a car.
2) 'Use of home' allowance
If you work from home, you can claim a proportion of the utility costs. It is important to only claim the proportion relevant to the room that is used for running the business.
3) Professional/Business subscriptions
Subscriptions to professional/business organisations that are relevant to the business are allowable.
4) Cleaning costs
If you work from home, you can claim a proportion of your cleaning costs; again pro-rating the total cost by the number of rooms used for business.
5) Assets bought before the business started
Assets bought before the business commenced trading are generally allowable. For example, a computer or other items bought in preparation for business.
6) Re-decorating your office
If you re-decorate your office, you can claim the re-decoration costs as an allowable cost.
7) Phone costs and broadband costs
Phone costs relating to business use can be claimed. Where a line is shared (business and private) a proportion of the costs can be claimed that relate to business use.
Limited Company Directors cannot claim broadband as an expense if there is any personal use.
8) Accruals
It is possible to include expenses that relate to goods or services provided before the year end (for example, legal costs) that are not billed until after the year end. This will ensure that tax relief is obtained as early as possible.
9) Losses
It is important to keep a record of losses as losses may be carried forward and used to save taxes in the future.
Disallowed Expenses
It is important not to claim the wrong expenses as this might draw unwanted attention from HMRC in the future.
1) Entertaining
There are strict rules about claiming entertaining expenses. Any expenses relating to entertaining customers or suppliers are disallowed. This seems unfair but the rule was introduced to stop people claiming for ski-ing trips and football matches etc.
However, if you are entertaining staff, for example for a Christmas party, you are allowed to claim £150 per person per annum.
2) Work clothes
Costs relating to work clothes are generally disallowed as it is argued that they could be used for private use.
3) Food and drink whilst away from home
Generally costs relating to food and drink are disallowed as HMRC regard this as an essential need. There are separate rules if you are staying away from home.
4) Gifts
Gifts to customers and suppliers are not allowable unless they promote the business and cost less than £50.
5) Tax and NI
These costs are not deductible (if you are a sole trader) against profits.
6) Medical Insurance and Dental Insurance
These costs are not allowable against profits.
7) Childcare
Sole traders cannot use the childcare voucher scheme which is available to employed individuals. There are no tax breaks available for childcare costs for self-employed people. However, it is possible to set up a childcare voucher scheme and get tax relief against the cost of the scheme if you have a limited company.
If you would like any advice in this area or any other areas of accounting or tax, please contact me on 07834988638 or mail@sjhaccounting.co.uk, www.sjhaccounting.co.uk. Sarah Hamilton takes every. care in preparing material to ensure that the content is accurate and up to date. However, no responsibility for loss to any person acting or refraining from acting as a result of this material can be accepted by Sarah Hamilton. You should always ask your accountant to give you specific advice which is tailored to your personal and business circumstances.
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