- A 3-piece suite for a business owner’s wife to sit on while he was doing his tax return
- A very generous business owner bought posh watches for Christmas for all of the staff……..despite not having any employees
- Armani jeans – claimed to be “protective” clothing by a decorator
- Flights abroad to get dental treatment as they had to look good for business meetings
- Pet food for a guard dog. Sounds OK…..until it turned out the dog was a Shih Tzu, which could only frighten away very small burglars.
- Underwear – OK if you’re in the Full Monty but not for the rest of us.
- A garden shed plus the cost of the part of the garden it sits on
As you can imagine, none of these were accepted.
What expenses can you claim?
The phrase that HMRC have traditionally used is that the expense must be “wholly and exclusively” for the purposes of your business to be allowable for tax relief. But, what does this mean?
At its simplest, ask yourself “Would I be spending this if I didn’t have the business?”. If the answer is “No”, then it’s likely to be an allowable expense. Examples would include:
- Stock – the items you’re buying to sell on, or to use to make your products.
- Premises costs – rent and then the costs of light, heat, etc for the business premises. Also any repairs
- Staff costs – wages, salaries and costs of subcontractors
- General office costs – stationery, tea/coffee
- Travel costs – travel to and from meetings and appointments
- IT costs – website, computers and software
- Advertising costs – networking, leaflets, etc
- Business assets – the method of claiming the tax may be different, but any assets you buy get tax relief – vans, furniture, machinery
But then there are also the “grey” areas where you have costs that you may have spent without the business, but you can now claim. HMRC are pretty sensible on these – for example, you can claim for a mobile phone.
What if I use things for business and personal use?
Often assets within businesses are used for both personal and business purposes. What can you claim tax relief on?
It is only the proportion of business use of these assets that can be deducted as an allowable expense.
Julie is a self-employed beautician. She uses her mobile phone for both private use and business related calls to contact clients. For the tax year, Julie’s phone bill was £520. 60% of these calls were used for contact with clients and 40% were personal.
When calculating allowable expenses, Julie can claim £312 (60% of £520) for business use.
Capital allowances may also be available on assets used in the business. Again only the proportion of the asset that is used for business can be claimed.
Daniel is a self-employed electrician. In his first year of trading he purchased a brand new car costing £15,000 with CO2 emissions of 110g/km. The car is used 75% for business and 25% for personal use.
The car will need to be placed into a single asset pool as it has dual purpose usage. Capital allowances for the car are 18% so, in the first year, capital allowances are £2,700. Only 75% of this is allowed as 25% is for private use. Therefore capital allowances in year one are £2,025 (75% of £2,700).
Working from home
If you operate your business from home, you can deduct certain expenses that relate to business use. These expenses can include telephone, internet, electricity, gas, council tax and cleaning costs. All costs must be apportioned into business use at a reasonable rate.
Simplified expenses allow you to claim deductions on expenses used at home for work purposes and mileage costs at a flat rate, ie instead of keeping the receipts and working out proportions.
However, this is only if capital allowances have not been claimed. This saves you having to keep detailed records of expenses and estimating business usage.
In summary, it comes down to common sense. Is it really for the business?
Some of the ridiculous claims could actually be OK……if they were genuinely for the business. For example, it’s OK to buy gifts for the team….if you have a team.
If in doubt, ask an expert – it’s what we’re here for! Now, I’m just off for a meeting with HMRC….in Hawaii.