Many people who start in business are under the illusion that they can claim any expense they incur as a business expense. Unfortunately, this is not the case as we’ll see in this post on Allowable Business Expenses.
So What Are Allowable Business Expenses?
HM Revenue and Customs have a detailed section on tax allowances and reliefs if you are in business. For an expense to become allowable (and this means as a reduction to your tax liability), it has to fulfil the following 3 conditions:-
- it isn’t capital expenditure – purchase of major assets
- it isn’t specifically non-allowable – such as business entertaining
- it is wholly and exclusively for business purposes
This is predominately expenditure incurred in order to obtain an asset where the useful life is greater than 1 year. These are items such as motor vehicles, fixtures, fittings, equipment so on. A lot also depends on the cost of the asset – for example the purchase of a computer may be around £500 and have a useful life of 2 years, but the cost does not warrant inclusion within the asset register. If, however, you were upgrading the whole computer system within your office and the likely cost was £5,000, then this would be included in the asset register and therefore capitalised.
Various legislation, namely Income Tax (Trading and Other Income) Act 2005, amongst others, states what type of expenses can be claimed and therefore allowable against Income Tax. For example, the Act states that business entertaining or providing gifts is not allowable. One could also argue that the giving of gifts could fall foul of the Bribery Act 2010 – as in providing a gift, you could be suggesting that the recipient uses your product or service over another’s therefore influencing their decisions.
Wholly and Exclusively For Business Purposes
Clients often ask me what they can claim as allowable expenses and my reply is two-fold. First, imagine if you were working for an employer and you asked to reimbursed for an expense you had incurred; what would the employer say? And second, if you were sat with a tax inspector from HMRC and they asked you to justify the expense, could you?
The expense has to be wholly and exclusively for business purposes – and that exclusivity is determined by the type of business you run.
For example, the purchase of £150 of dog food; this would not be allowable if you are a carpenter however if you ran a kennel, it would be. How about the purchase of a 50″ 3D LED TV (this actually happened) by a builder? The explanation was that he needed to show clients presentations on it (the TV was placed in his flat); an expense that HMRC would probably NOT allow.
So the rule is, if you can reasonably justify the expense as a legitimate business cost, then you can allow it (subject to guidance in legislation) but if you are in any doubt, it is best to ask your accountant.