When compiling your end of year expenses, or even when you are contemplating business expenditure, you will naturally want to know exactly what expenses are tax deductible. There are some business expenses that are NOT tax deductible despite common sense suggesting they ought to be. There are also differences, somewhat bizarrely, between what a limited company can claim compared to sole-trades and partnerships. In this blog, we outline some of the major categories of expenses that cause taxpayers some surprise.
The over-riding principle is the “wholly and exclusively” rule. This means that an expense must be incurred completely for business – there must NOT be a dual-purpose of private benefit, for example.
Ordinary clothing worn while working is not tax deductible due to the above rule: it is not “wholly and exclusively” for business. Clothing is worn for warmth and decency purposes, and therefore clothing that happens to be worn while working does not render it a business expense. Protective clothing, however – which is worn to protect the body and ordinary clothing – is allowable. Any warmth and decency benefits are incidental to its primary purpose of protection, the need for which has arisen solely because of the worker’s job.
If you are an entertainer, you can claim the clothes you buy as part of your act, providing they are not ordinary clothing you would wear while not working.
Travel and subsistence
For company employees and directors, you may claim travel and subsistence expenses (i.e., meals) for journeys that are not to your usual place of business. Commuting costs to a permanent place of work (and you might have more than one) are not allowable. Also to your primary business premises, workplaces are deemed permanent if the worker spends at least two years and more than 40% of his working time there.
While the rules for companies are established in tax law, the rules for sole-traders and partnerships are not so clear. The tax legislation is not explicit, and so case law must be relied on, i.e., what judges have decided when tax payers and the Revenue go to court. The general rule is that itinerant workers – who change their places of work – may claim for business travel and subsistence. There have been some puzzling court decisions regarding what expenses are allowable, so we recommend you get in touch and let us know your circumstances so that we can advise.
The costs of learning a new trade cannot be claimed, but update courses and training for an existing trade may be claimed.
While entertainment of employees can be claimed up to certain limits, client entertaining cannot be claimed. If you met a customer at a coffee shop rather than hiring a meeting room, the cost of the food and drinks are regrettably not tax deductible.
Use of home
You can claim a proportion of your household costs against your tax if you work from home. The exact method varies depending on whether you run your business as a limited company or a sole-trade/partnership. You are entitled to claim less if you are a limited company: you can only claim the extra costs (e.g., light and heat, phone) that working from home has cost. If you are self-employed, you can claim a proportion of your home running costs such as rent/mortgage interest, council tax and light and heat bills. The amount you claim should be worked out as a fair approximation of the running cost of the space you worked in, e.g., by taking into account the number of rooms in your home and the amount of time you spent working.
Please feel free to check with Southside Accountants in Wimbledon, if you would like confirmation of any other types of expenses you would like to claim.