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You've set up your own business and are ready to trade. But don't think you can put everything on the company accounts: there are some hard and fast rules about what does and what doesn't constitute a business expense.
However, if you report your expenses carefully and correctly, you will benefit from a reduction in your tax bill that reflects what you and your business had to pay out across the year.
At its most basic, business expenses fall into one of two categories when it comes to self-assessment, which is the form the taxman uses to assess anyone who is self-employed.
These two categories are allowable and non-allowable expenses.
Permitted claims
Broadly speaking, you are allowed to deduct, from your turnover, all the costs that you incur for the sole purpose of earning business profits. These are known as allowable expenses.
Some examples of legitimate types of business expense are the goods you have purchased for resale or the materials that are used by your business to make goods to sell.
The rent for your business premises, electricity for heating, lighting and manufacture, and cleaning are also allowable business expenses, fortunately!
The list also includes accountancy charges, advertising, employees' wages before deductions, legal fees associated with the business, and stationery.
You deduct your business expenditure, in your accounts, for the period it was incurred in, even if you are not due to pay the money until later on.
No way, José
The second category, non-allowable expenses, includes the sorts of expenses you are not allowed to claim.
These include costs that you incur for a non-business purpose, such as your own personal expenses. A pint after work, for example, or that bestseller that you want to read on the train cannot be claimed!
Capital costs are also classed as non-allowable expenses, and these are the costs of buying fixed assets (such as buildings) or intangible assets (such as goodwill), which will last for several years. However, you may be able to claim what are called 'capital allowances' on these capital costs, which help with the bill.
There are a number of other business expenses that self-employed people are not allowed to claim, and these include fuel expenses for non-business use of vehicles; any payments made for non-business work; depreciation of fixed assets and non-business motoring.
Special dispensations
Some businesses can apply for special dispensations from HM Revenue & Customs, but still have to keep detailed records of the expenses. Dispensations can cover 'benefits in kind' such as entertaining and subscriptions to professional bodies. The big 'but' is that directors or accounts staff who authorise their own expenses may be excluded from these dispensations, so be warned!
If you have employees, you can grant them travel expenses, and expenses for entertaining, mileage and overnight accommodation. These expenses payments made to employees are normally classed as part of their earnings, unless they are already taxable or are covered by a dispensation.
When it comes to overnight accommodation, the accommodation itself is not taxable, and employees are allowed to claim for a meal, including alcoholic and non-alcoholic drinks; tea, coffee and soft drinks between meals; and even additional personal expenses such as newspapers, laundry and home telephone calls. Not bad.
Final VAT note
One final note: if you are VAT-registered, you are not allowed to reclaim any VAT you are charged on purchases that directly or indirectly relate to activities outside the scope of the business.
So the message is, work hard and play hard but keep work and leisure separate when it comes to the books!
Related information:
What you need to know about tax - read more about what is required by HMRC of small businesses.
Keeping accounts - a guide on keeping accurate accounts.
Dealing with staff - how to recruit the best staff and ensure they are motivated and happy in the workplace.
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