When running a business, it is inevitable that you will incur expenses. If allowable, business expenses can reduce your net profit and as such could potentially reduce your tax liability. Sometimes, it can be tricky to gauge whether your business expenditure is considered allowable. HMRC consider expenses to be allowable when they are “wholly and exclusively” for the business. In more traditional businesses expenses will be much simpler. However, nowadays, with new career paths and more of the population than ever before becoming self-employed, it can be difficult to know whether your business expenses are allowable or not. For example, a sole trader who has an office that they work from at home. They can still claim part of the rates/rent that apply to the room (assuming that the office is used solely for the business) as long as the amount has been proportioned appropriately. It should be noted that documentation with respect to expenses i.e. invoices, receipts, mileage spreadsheets should be kept for a minimum of 6 years.
Types of Business Expenses: Vehicle
Many will need to claim back vehicle expenses even if you are employed and do not complete a self-assessment tax return (SATR). It is likely that if you travel a lot for work that you can claim back your mileage. Most companies will have a policy in respect of this, although, it is generally known that most companies will reimburse employees at a lower rate than HMRC’s guidance. In such instances you can complete a P87 in order to claim the difference back. This usually is possible if you are either using your own car or a company car. If you think you may be eligible, the link below contains a helpful questionnaire on HMRC’s website that can help you determine if you can claim mileage:
Now if you claim, you will need to keep documentation of your mileage for at least 6 years. The most helpful way to do so would be to keep a spreadsheet.
Included in allowable vehicle expenses are things like parking and tolls, however, this does not include parking penalties or speeding fines. If your business is your vehicle, for example you run an ice cream van, then repairs and maintenance to the vehicle will be considered an allowable expense.
Types of Business Expenses: General
Most businesses will have similar expenses no matter how different the trade. For example, rent and rates for the premises are allowable expenses that are incurred that don’t directly attribute to either the finished product or the service provided but are a necessity in order for the business to carry on functioning. These overheads can be claimed as long as they are in relation to the business, this includes, insurance, any legal fees, accounting fees, telephone & mobile fees, advertising and marketing and of course employees’ salaries.
Employee expenses, generally covers anything that the employee incurs on behalf of the business. This can include travel, subsistence, as mentioned above mileage, or any training fees. Any items included in running payroll for the employees, i.e. their annual bonus (if they are lucky enough to get one) will be allowable and of course all employer’s NICs. It should be noted that you can also claim expenses for staff parties. However, this is solely for the staff. Networking is not an allowable business expense and as such, meals out with clients etc. are not allowable.
Another allowable expense is a bad debt. Businesses at some point will have a debt go bad. Generally, this is done when the business makes a decision that they will not receive any monies from the debtor and instead make a decision to write it off. If your business is VAT registered, then after six months you can reclaim any VAT paid on the original sale. If you are not VAT registered, you can claim this amount as an expense. It should be noted that you can only claim a bad debt as an allowable expense if you are using the accruals accounting method when preparing you accounts. Cash basis entities cannot claim a bad debt as no money has ever passed hands, so in effect the debt does not exist.
Types of Business Expenses: Property
If you do not run a business so to speak but do let a property then it is time to tune in, there are several expenses in which you can claim back.
There are many expenses listed above that can be claimed, for example, insurance (landlord, property etc), mileage for travelling to the properties in order to complete your landlord duties, rents, ground rents and service charges. If a lettings agent manages your property on your behalf, then you can claim the management fees. Bad debts can also be claimed, again, providing you were on the accruals accounting method.
HMRC guidance lists the following common property expenses:
- general maintenance and repairs to the property, but not improvements (such as replacing a laminate kitchen worktop with a granite worktop)
- water rates, council tax, gas and electricity
- insurance, such as landlords’ policies for buildings, contents and public liability
- costs of services, including the wages of gardeners and cleaners
- letting agent fees and management fees
- legal fees for lets of a year or less, or for renewing a lease for less than 50 years
- accountant’s fees
- rents (if you’re sub-letting), ground rents and service charges
- direct costs such as phone calls, stationery and advertising for new tenants
- vehicle running costs (only the proportion used for your rental business) including mileage rate deductions for business motoring costs
From April 2016 wear and tear allowance is no longer available as a deduction from rental profits. Instead HMRC have introduced Replacement of Domestic Items Relief. This means that for furnished properties, you will be able to deduct any costs incurred in replacing existing furniture and appliances once it reaches the end of its useful life. It should be noted that in consequence of this change, expenditure on replacing carpets and white goods will be allowable as a deduction in calculating taxable rental profits. Previously, no deduction was allowable in relation to these items.
One final expense that many uses in respect of their property expenses is interest on mortgage repayments. It used to be that you could claim all of the mortgage interest as an allowable expense, however, with the introduction of the Restriction of Relief for Finance Costs, this is no longer the case. This legislation now restricts the amount of finance costs that can be claimed as a deduction. Now, from 2017/18 the relief was restricted to the basic rate of income tax. For further years, the restriction is being phased in at 25% per year until 2020/21 where going forward, no deduction will be allowable in respect of finance costs. However, along with the restriction, a basic rate income tax reducer is being introduced and being scaled up by 25% by tax year.