A guide to tax-deductible business expenses
Submitting your tax return as either a self-employed individual, a sole trader or a limited company can sometimes feel like an overwhelming task, especially when it comes to identifying allowable expenses and understanding the many rules surrounding them.
Nadia Hossen Mamode, Chartered Accountant at Bee Accountancy, explains what you can claim for and how to make the process as pain free as possible.
What are allowable expenses?
Allowable expenses (or tax-deductible expenses) are the costs incurred during the day-to-day running of your business. HMRC allows you to deduct these expenses from your income to reduce your taxable profit and subsequently your tax charge.
The HMRC website provides detailed guidance on what constitutes an allowable expense, and we have listed some of these below. However, for any industry-specific expenses that are not covered, it is always advisable to speak to your accountant or contact the HMRC self-assessment helpline.
What are the different types of allowable expenses?
Allowable expenses include the majority of costs incurred in the day-to-day running of an office, including the costs that come with your business premises, such as utilities, business rates and repairs, as well as stationery, phone bills and computer consumables.
Workwear and associated laundry costs are counted as allowable expenses, along with staff salaries and subcontractor costs. In addition, travel costs incurred for business purposes can also be claimed as tax deductible expenses, although there are some restrictions on mileage claims which are covered in more detail below.
Costs associated with carrying out your trade also count as allowable expenses. Some examples of trading costs include stock items that you buy to sell, plus advertising, marketing and website costs. You can also claim professional fees as allowable expenses, which could include accountancy fees and legal fees.
Every business is unique, and your insurance needs will be too. Business insurance costs including public liability insurance, professional indemnity insurance, cyber cover, contents cover and employers' liability insurance are all treated as allowable expenses by HMRC, so ensure your policies are up-to-date and that you are covered for all eventualities.
Bank interest on business loans or on an overdraft facility is also an allowable expense, along with any bank charges incurred.
Types of disallowable expenses
There are also expenditure items that you are not allowed to claim against your income, even if these are deemed to be incurred in the interests of your business. These include, but are not limited to:
- Entertaining of non-staff members, e.g. clients and suppliers
- Purchase of assets to be used in your business, such as computer equipment or machinery (see capital expenditure below)
- Depreciation of fixed assets
- Improvements to business premises
- Childcare costs - while these are not tax-deductible, individuals can enrol for the government's Tax-Free Childcare scheme to assist with these costs
Capital expenditure or revenue expenditure?
Allowable expenses that relate directly to the running of your business, where the costs typically span less than two years, are referred to as revenue expenditure.
A business may also incur costs on assets that are expected to last longer than two years, such as motor vehicles for business use or computer equipment. These will be shown as assets on the business balance sheet. As the items are used, the cost of the use is shown as depreciation on the income statement. The assets and depreciation are not tax-deductible expenses.
The tax relief will be obtained through capital allowance on the cost of items that fall under the definition of plant and machinery. Annual Investment Allowance falls within the category of capital allowance and covers up to £200,000 of relevant costs each year. Annual Investment Allowance cannot be claimed for company cars whereas vans do qualify. This area of tax can be complex and it is always advised to speak to your accountant.
Rules on claiming allowable expenses
For certain expenses, there are rules and restrictions to take into consideration before claiming as an allowable expense.
If an identified allowable expense covers both business and personal use, e.g. using your phone for both personal and business calls, then only the business portion of the cost can be included.
Working from home
Using your home as your office will change the amount of allowable expenses you can claim, but will not affect the type of expenses you can claim for. The guidance from HMRC is to apportion the expected premises costs based on how often you are working from home, and what area is used as an office.
When reimbursing individuals for business travel through a mileage claim, HMRC allow an amount of 45p per mile to be paid to the employee, up to a distance of 10,000 miles. Any mileage claims over 10,000 miles should be reimbursed at a rate of 25p per mile. If a higher mileage rate is paid, e.g. 50p per mile, then the individual may be required to pay an additional tax on this amount.
This mileage allowance is the same for both self-employed individuals and employees of a company.
Other tax credits
Depending on how you choose to operate your trading, you may also be eligible for additional tax credits that could further reduce the amount of tax you will have to pay once all allowable expenses have been deducted. Further information on these can be obtained from the HMRC website or by speaking to a financial expert.
Keeping track of your expenses
To ensure compliance with the HMRC regulations, you must keep records detailing your business income and all expenses, along with supporting documents, including receipts, invoices, rental agreements and any insurance policy documents. Without these supporting documents you will not be able to claim the item as an allowable expense.
If you are self-employed, the records and supporting documents must be kept for five years from 31 January following the end of the tax year in question. If you are a limited company, the records and documents must be kept for six years from the end of the financial year. Records can be kept digitally using online accounting software.
For further information on filing a tax return, read our guide on Making Tax Digital.
To find out how our flexible insurance for business owners and self-employed professionals can help you to safeguard your finances, click here.
Nadia Hossen Mamode, from Bee Accountancy, is on a mission to empower entrepreneurs to make profitable business decisions by understanding their numbers. Bee Accountancy is a tech-savvy paperless business operating fully online and working with entrepreneurs throughout the UK.