Allowable Expenses Explained

There are a lot of outgoings and expenses when you’re running your own business, and knowing which of these constitute allowable expenses (those that you are allowed to put through your company’s accounts) is really important. Once your allowable expenses have been deducted from your turnover, you’ll pay tax on your profit, so claiming for all the expenses that you’re entitled to can help reduce your tax bill. However, on the other hand, you don’t want to be claiming tax relief against purchases that don’t qualify, so it really pays to have a good understanding of this area.

Essentially, for an expense to be allowable, it should be “wholly and exclusively” for business purposes. For a lot of business expenses this is quite straight forward and includes items such as goods bought for resale, office expenses, business travel, professional fees (such as accountants and solicitors), advertising and marketing costs and so on, but there are some areas that cause confusion and we get asked quite a lot about these.

Clothing

Uniforms and protective clothing are generally allowable, however everyday clothing is not. A client once submitted a receipt for a normal, everyday business suit that he had bought to wear for a business meeting. We explained that this couldn’t be included as a business expense, to which the client replied “Does HMRC expect me to attend my meetings naked?” Well, what could we say to that! But in essence, if it’s an everyday item of clothing that isn’t specifically required for business use, then it won’t be permitted as an allowable expense.

Entertainment

The rules around entertaining are complex. Client entertaining, in most cases, is not tax deductible, and the VAT incurred on client entertainment is usually not recoverable (though VAT incurred when entertaining overseas customers can be).

With staff entertainment, it’s important to understand what constitutes a staff member as the cost of entertaining subcontractors, shareholders, and the spouses or partners of staff etc, is treated differently.

It’s also important to bear in mind that staff entertainment can be classed as a benefit, and employees may therefore technically be liable for income tax on the value of the benefit. However, if the entertainment falls within the parameters of what’s known as the Annual Party Exemption, employees should not incur any income tax liability. In order to qualify for the Annual Party Exemption, there are a number of requirements which need to be satisfied, the main ones being that the event should be annual in nature, open to all employees and the cost should not exceed £150 per head.

Travel Expenses

If you use your privately-owned vehicle for work purposes, you can claim allowable business expenses for the costs associates with running your vehicle, such as vehicle insurance, repairs & servicing, fuel, and so on. The amount you can reclaim will depend on the proportion of business travel you do. Alternatively, you may find it’s easier to claim simplified expenses whereby a record of business mileage is kept and a flat rate amount is claimed per mile. Currently, the first 10,000 business miles incurred per year can be reclaimed at 45p per mile, and it’s 25p per mile thereafter.

To be considered an allowable travel expense, a journey must be from one workplace to another, for the purposes of work. Travel from home to permanent workplace is classed as commuting and is not allowable.

Other travel expenses, such as train fares and hotel accommodation for overnight stays, can be reclaimed provided they are wholly and exclusively for business purposes.

Staff Costs

Employee salaries, bonuses and pensions can all be claimed as allowable business expenses, as can employer’s National Insurance, subcontractor or agency staff fees, and uniforms and training for employees.

Paying yourself can be a little more complex and depends on whether you run your business as a sole trader or as a limited company. A sole trader withdrawing money for personal use does so by taking drawings, but these are not tax deductible. The salary paid to a director through the PAYE scheme of a limited company will usually be tax deductible, as it would be for any other employee of the company, but dividends are not tax deductible. An accountant will be able to advise on the most tax efficient method to withdraw money from a business, as there are many factors to consider.

And remember, whatever business expenses you do claim for, make sure you keep your receipts and invoices and any other relevant records. You’ll need to retain these for a minimum of six years, but electronic format is fine.

This is intended as an introduction to what can be claimed as an allowable business expense. All businesses are different and it’s important to understand how the rules apply to individual circumstances. For tax advice we recommend consulting an accountant or other qualified professional.

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