Deductible vs non-deductible business expenses

Expenses can be claimed as an allowable business expense but there are strict rules about which are allowed by HMRC. David Redfern, managing director of DSR Tax Claims, explains what can and cannot be claimed as an allowable expense

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.

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 a room in the house is used as a business office or a business vehicle is sometimes used for personal trips, it is essential 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 six years in case HMRC requests them.

Running costs

Expenses incurred in the running of a 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 (NICs), pension contributions and benefits all adding up.

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 for client, customer or supplier entertainment. You also cannot deduct the cost of any driving or parking fines, even if they were incurred while on business travel. Any expense incurred for your own use will not 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, just like the cost of providing your own meals or civilian, non-uniform, clothing.

 Non-physical business expenses

Often forgotten areas of allowable expense include non-physical business expenses such as professional fees, banking and credit charges, insurance and interest charges.

Not only can you deduct the costs of professional fees, such as the fees paid to an accountant or solicitor, but also the cost of any bank charges, credit card charges, leasing payments and interest charges on any financing arrangements that the business requires to function.

However, there are a few notable exceptions - you cannot 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.

Property

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.

Business assets are generally non-deductible, except in certain circumstances for sole traders using cash basis accounting. 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.

About the author

David Redfern is managing director at DSR Tax Claims

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