Allowable expenses are the essential costs of running your business that are tax deductible. Any outgoings that are allowable expenses can be deducted from your taxable income, allowing you to save money and reduce your tax bill.
What Are Allowable Expenses?
Keeping a good tax record will help you be tax efficient by deducting all of your allowable expenses before you submit your profits to HMRC. Allowable expenses aren’t considered part of a company’s taxable profits. You therefore don’t pay tax on these expenses. For example, if your business has a turnover of £40,000, and you claim £10,000 in allowable expenses. You only pay tax on the remaining £30,000 – known as your taxable profit. Only certain costs can be claimed as allowable expenses. A good rule of thumb is to ask yourself if these are essential running costs. This includes anything that your business could not trade without. This may include stationary, phone bills or other items that you use for less than two years. Costs of business premises such as utility bills and rent. Travel costs incurred by your business activity such as fuel, parking or train tickets, however this does not include travelling to and from your regular work premises. Staff costs such as wages, salaries, bonuses and pensions. Clothing costs such as uniforms or protective clothing. Legal and financial costs such as credit card charges, overdraft, fees, insurance policies or hiring the services of accountants, bookkeepers, solicitors or surveyors. Advertising and marketing costs such as printed adverts and the cost of building a website. Items that you only buy to sell on such as raw materials or merchandise.
What Are Not Allowable Expenses?
Allowable expenses do not include money taken from your business to pay for private purchases. Most small businesses can claim allowable expenses, but there are a few exceptions. You can’t claim allowable expenses if you use the £1,000 tax-free ‘trading allowance’, and separate rules apply to limited companies. Some costs that are not allowable expenses are any costs associated with buying property, travel to and from work, everyday clothing that you wear to work isn’t an allowable expense and you can’t claim legal fines.
Business Expenses vs. Personal Expenses
When claiming your allowable expenses, you must differentiate between business costs and personal expenses. This is because you can’t claim any private purchases as allowable expenses. If you use money from your business to pay for a personal expense, you shouldn’t include the cost when calculating your annual allowable expenses. Small businesses and freelancers, it’s common to have expenses that cover both business and personal costs. Under these circumstances, only the business costs can be claimed as allowable expenses. For example, you use your car to drive to meetings with clients, but you also use it to get around outside of work. You spend £200 a month on petrol. You calculate that you use 25% of the petrol during work-related trips (not including journeys between home and work). You can therefore only claim £50 a month as an allowable expense for fuel.
What Can You Claim as Allowable Expenses?
If you’re self-employed, your business will have various running costs. You can deduct some of these costs to work out your taxable profit as long as they’re allowable expenses. If you run your own limited company, you need to follow different rules. You can deduct any business costs from your profits before tax.
Costs you can claim as allowable expenses:
- office costs, for example stationery or phone bills
- travel costs, for example fuel, parking, train or bus fares
- clothing expenses, for example uniforms
- staff costs, for example salaries or subcontractor costs
- things you buy to sell on, for example stock or raw materials
- financial costs, for example insurance or bank charges
- costs of your business premises, for example heating, lighting, business rates
- advertising or marketing, for example website costs
- training courses related to your business, for example refresher courses
Claiming clothing costs must be for branded clothing with a logo to qualify as an allowable expense, or PPE. Prestige Business Management can help advise you in this area, personal trainers for example can claim for certain types of clothing.
You can claim capital allowances when you buy assets that you keep to use in your business, for example equipment, machinery, business vehicles, for example cars, vans or lorries. You can deduct some or all of the value of the item from your profits before you pay tax. You cannot claim capital allowances if you use your £1,000 tax-free ‘trading allowance’.
Working From Home
If you are working from home, you may be able to claim a proportion of your costs for things like:
- Council Tax
- mortgage interest or rent
- internet and telephone use
You need to use a reasonable method of dividing your costs, for example by the number of rooms you use for business or the amount of time you spend working from home. For example, if you have 4 rooms in your home, one of which you use only as an office. Under these circumstances if your electricity bill for the year is £400. Assuming all the rooms in your home use equal amounts of electricity, you can claim £100 as allowable expenses (£400 divided by 4). If you worked only one day a week from home, you could claim £14.29 as allowable expenses (£100 divided by 7). A working from home calculation should be done properly as HMRC do investigate how you came to a number and it’s something that Prestige does for its clients as part of its sole trader or limited company packages.
Simplified expenses are a way of calculating some of your business expenses using flat rates instead of working out your actual business costs. You don’t have to use simplified expenses, you can decide if it suits your business. Simplified expenses can be used by sole traders and business partnerships that have no companies as partners. You must calculate all other expenses by working out the actual costs. Simplified expenses cannot be used by limited companies or business partnerships involving a limited company.
You can use flat rates for:
- business costs for some vehicles
- working from home
- living in your business premises
Keep records of your business miles for vehicles, hours you work at home and how many people live at your business premises over the year. At the end of the tax year use the flat rates for vehicle mileage, working from home, and living at your business premises to work out your expenses. Include these amounts in the total for your expenses in your Self Assessment tax return. These are all examples, it’s important to point out that every industry has its own peculiarities. Talk to Prestige Business Management about your own industry.