To Claim, Or Not To Claim ... That Is The Question!

When you're starting your own business, it's essential to have your mindset focused correctly on allowable business expenses from day one ...

Make sure you keep all of your receipts as many may be allowable business expenses!

That sounds obvious, but the devil is in the detail, as it always is with HMRC, so having a clear understanding of what is, and what isn't an allowable expense matters. If you get things right from the beginning, you will save yourself a lot of bother later on.

Well, put simply, allowable expenses are tax deductible, thus what you spend on them can be deducted from your revenue before your tax is calculated. Sound good? Yes, we like them too. But to make sure you don't accidentally fall into the category of 'tax avoidance', it's important to know what is, and what isn't, allowable.

At Essendon, if a client is ever in doubt regarding the eligibility of an expense item, we always recommend they remember HMRC's golden rule: Has the expense been incurred 'wholly and exclusively' for the purposes of the business? Because if there is a mixture of private and business use involved, it's likely to be disallowed.

So, for example, as HMRC has often suggested, you eat to live not to work ... which means your weekly food shop, even if you work from home, will not make the cut. As an aside, of course, meals and refreshments during meetings aren't straight forward, and we'd recommend that you have a chat with us to decide what is, and what isn't, acceptable. But that's what good accountants are there for ... to give you guidance when you need it.

So, what things are definitely 'in'? Examples of allowable expenses are:

Raw materials which you will work upon to produce a good for sale
Stock for resale
Rent and rates
Office costs such as stationery and telephone costs
Travel costs such as train, bus travel and parking
Employee and sub-contractor costs
Marketing and advertising
Professional cost such as accountancy
Insurance costs incurred for the business
Banking costs

And there's a little help for those who work from home.

An interesting allowable expense claim though, that some self-employed or small business owners miss, are the premises costs when you work from home. If that's you, you'll be glad to know you can claim back a percentage of things like:

How much can you claim? Well HMRC asks that you find a 'reasonable method' for dividing the costs between personal and business use. To make it easy, they suggest using the number of rooms used for business purposes, or the time spent working from home. For example, if you worked 40 hours a month from home for 10 months, but worked 60 hours during two particular months, the calculation would be:

But, as already mentioned above, there are costs incurred by a business owner that sit in a grey category; for example, the allowable cost per employee for a Christmas party. And, of course, then there's the whole car thing. The costs involved in running a vehicle used for business may be allowable. However you have to approach this in the correct way, so we always recommend taking advice because there are hoops one has to jump through to make that work.

One also needs to understand that some purchases have to be treated as assets, where the tax benefit is felt via capital allowances rather than as an allowable expense. Again, your accountant will be able to guide you on this. Another contentious category is entertainment. Put simply, although entertaining a client can be a big part of winning a contract, the entertainment costs are not tax deductible. Sorry! We can see where HMRC are coming from on this, but it's still a bitter pill to swallow.

But before you throw your arms up in despair, fear not. Yes, expenses are a complex area of taxation, fraught with rabbit holes down which to tumble. But the good news is that an accountant with the right qualifications and experience of working with small businesses has a very good knowledge of this area.

With a bit of guidance there is absolutely no reason why you can't oversee a lot of this yourself on a day-to-day basis, and just check in with your financial guru from time to time to make sure you're staying on the correct path.

If you'd like to find out more about allowable business expenses then do give me a call on 01908 774320 or click here to ping me an email and let's see how I can help you.

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More about Roger Eddowes ...

Roger trained at Edward Thomas Peirson & Sons in Market Harborough before working at Hartwell & Co, followed by Chancery, as a partner. He started Essendon Accounts and Tax with Helen Beaumont in 2014 as a general practitioner with a hands-on approach.

Roger loves getting his hands dirty, working with emerging, small-to-medium and family businesses to ensure they receive the best possible accountancy advice. Roger utilises an extensive network of business contacts to leverage the best guidance and practical solutions.

To Claim, Or Not To Claim ... That Is The Question!

The art of allowable business expenses ...