Allowable Expenses is a fitting subject to start with as a significant proportion of our queries stem from this. The rules about which expenses can be justifiably claimed for tax purposes are opaque and differ from the accounting rules.
There are different rules depending on whether you trade through a limited company, whether you trade as a sole trader or via a partnership, have a property business, or are an employee.
For all, however, we start with the phrase “wholly and exclusively” – this phrase is the reason why, for example, most clothing (but see the “C for Clothing” blog coming soon) is not an allowable expense – because we have to wear clothes even if we were not coming to work. In the same way, if you are a sole trader or a partner, your car expenditure is limited to the business use only. HMRC has a particular phrase for this sort of mixed use – “duality of purpose.”
There are some exclusions that are set out by tax law. These include the rules that separate out capital expenditure against revenue expenditure. Put briefly and very simply, revenue expenses are the day-to-day running costs (office costs, for example) that can be set against your turnover to reduce your profit for tax purposes. Capital expenses are often one-off costs that are not allowed to be set against your profit in the same way as revenue costs. There may be a different way to get a tax benefit from the expenditure but it is less straightforward.
If you are an employee that “wholly and exclusively” phrase is made more difficult by the addition of the word “necessarily.” Effectively, HMRC assumes that your employer will provide everything you need to do your job and so there is a very high bar to pass before an employee can claim anything other than a very limited sort of expenses against their PAYE income.
Other expenses have differing treatment depending on the type of business and the business vehicle. So residential mortgage interest can be set against rental income within a limited company but not within an unincorporated business; a tax allowance for goodwill can be claimed by a company but not by a sole trade or partnership.
All expenses should be validated, preferably by the appropriate VAT invoice. HMRC are within their rights to disallow any unvouched expenditure, although in reality, some common sense comes into play.
A last point to emphasise is that some decisions on the allowability of an expense are subjective and the tax officer may have a different view – for example whether your mobile phone has no personal use, is used 50:50 for business and private or no business use. We advise that any amount claimed must be justifiable and that, in a worst case scenario, you must be prepared to justify your claim in front of the tax officer.
All advice in this blog is accurate at time of writing. As always, please use our advice as a guide. No liability can be taken for action based on this blog. Always seek advice from a licensed professional.