No-one wants to pay more tax than they need to. Consequently, it is important to keep good records of business expenses so that deductible expenses are not overlooked.
The basic rule is that a deduction is allowed for expenses incurred wholly and exclusively for the purpose of the trade, profession or vocation. Unlike the equivalent rule for employment expenses, there is no requirement that the expense is ‘necessarily’ incurred. This means that as long as an expense is incurred for the purposes of the business and only for that purpose, a deduction is given.
Private expenses are not deductible
No deduction is given for private expenditure and under no circumstances should private items be `put through the business’. It is good practice to keep private and business expenditure separate and to have a separate bank account for business expenses. If you run your business as a limited company, the company should have its own bank account.
Mixed use expenses
If you incur an expense for both business and private purposes, you can deduct the private element if this can be separately identified. This may be the case if you use a phone for business and private calls. Any apportionment should be on a just and reasonable basis. If you cannot separate out the private use and the expense has a dual purposes (such as work clothes which also provide warmth and decency), the expense should not be deducted.
No deduction for drawings
If you operate your business as a sole trader or other unincorporated business and you pay yourself a salary or take drawings from the business, you cannot deduct these when working out your profit. You pay tax on your profit and are free to use the profits as you please. However, if you operate as a personal or family company, you can deduct any salary that you pay yourself (together with any employer’s National Insurance and employer pension contributions).
Capital expenditure can only be deducted in computing profits if you use the cash basis and the expenditure can be deducted under the cash basis capital expenditure rules. You cannot deduct capital expenditure if you prepare accounts under the accruals basis.
Common deductible expenses
The actual expenses that can be deducted will vary from business to business – what is important is that they are incurred wholly and exclusively for the purpose of the business. However, the following are example of common deductible business expenses.
- Cost of goods sold, such as raw materials and goods brought for resale.
- Distribution and packaging costs.
- Office expenses, such as stationery and printing costs and phone bills.
- Travel and subsistence expenses, such as fuel parking and fares for using public transport and hotel bills for overnight business trips.
- Motor expenses, such as car insurance, MOTs and repairs.
- Staff costs, such as wages, salaries, employer’s National Insurance and pension costs.
- Rent and rates.
- Gas, electricity and water bills.
- Repairs to business expenses.
- Advertising and promotion costs.
- Bank interest and other finance costs.
- Accountancy, legal and other professional costs.
- Uniforms (but not general clothing even if only worn for work).
A deduction for certain expenses is expressly prohibited. This includes the cost of business entertaining, which if deducted in computing accounting profit must be added back to arrive at taxable profit. Likewise, depreciation (an accounting concept) is not deductible in arriving at taxable profit; instead relief is given in the form of capital allowances.
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