Claiming a tax deductible expense, we know, is a minefield. There are so many rules and expenses to consider, with the rules changing all the time, how do you know what expenses you can deduct legitimately to reduce your tax bill?
We are all aware of the publicity of MPs being embroiled in controversial expenses claims, and this has prompted many small and medium sized businesses to consider what can – and cannot – be claimed. A considerable amount of legislation exists around defining tax deductible expenses, and the rules are constantly being reviewed and clarified, hence the need by many businesses to entrust an accountant to guide them through this murky process.
With more and more people taking the self-employment route, the focus for start-ups and small and medium businesses is of course on cash flow and maximising income to continue on the growth trajectory. Understanding what is permissible when claiming back expenses therefore is key.
“Wholly and exclusively”
Self-employed workers, and this includes those in partnership, can in general claim all expenses that were incurred wholly and exclusively for business purposes. Simply put, any expenses related to your trade can be deducted from your income, and you would pay tax only on what income you have left thereafter.
So where’s the complication?
Invariably, personal and business activities often overlap. For example, making calls to customers, friends and family all from the same telephone. The same can also be true for car travel and considering what mileage costs can be claimed back as a business expense.
What can’t you claim for?
Expenses that you can’t claim include are your own wages, premiums on personal insurance policies, income tax and National Insurance contributions. And if you have employees, they can only be reimbursed expenses by their company if they are wholly incurred exclusively and necessarily for business. This is particularly important for company directors who might be seeking compensation from their company for the costs of using their home as an office.
There is also a consideration of “dual purpose” expenses, which cannot be claimed as a deductible expense, for example, purchasing a suit for work. So clearly not as simple as it first seems.
Expensive pieces of equipment, including tools, vehicles, equipment, and fittings, etc. are not deemed “expenses” as such but are claimed as “capital allowances” on your tax return, whether you are self-employed or a limited company. This relates to one-off expenditure to buy or improve an asset you keep and use for your business. For example, if you set up as a window cleaner and need to buy a ladder, this would count as capital expenditure. There is an “annual investment allowance”, which is currently £500,000, which limits the amount of expensive equipment that can be claimed in full when it is bought.
There are also some special rules that apply to certain professions. For example, if you are a farmer, gardener or artist, you might be able to reduce your tax bill by claiming to average your profits over two years. This is intended to help even out fluctuating results and enables you to add together profits for two years and be taxable on half the total for each of the two years.
Remember that claims for expenses which are not incurred are tantamount to tax fraud and could land you in serious trouble. If in any doubt about what you can and can’t claim, always get advice from a qualified accountant, like ourselves, and the good news is you can claim back any fees charged by an accountant.
How can we help?
If you require further advice on claiming expenses as a sole trader or limited company business owner, please contact us to help you through the process as tax efficiently as possible.
Often there is a requirement for forward tax planning to take full advantage of the tax reliefs available to you and your business. We strongly recommend you speak with a tax and accounting specialist like Southside Accountants, your local accountants in Wimbledon and London. Please contact us to see how we as your accountants can help you run your business effectively.
Southside Accountants provide sole trader and limited company services, including tax return services, to small businesses in the UK and are a Xero Certified Advisor.
Written by Shaima Todd.