A recap on what can/cannot be claimed.
In general, an expense incurred wholly and exclusively for the purposes of the trade can be claimed while computing taxable profits of the business. Expenses must be for business purposes only and any private use element should never be claimed.
Expenses can be categorised in two categories: revenue expenses or capital expenses. Broadly, capital expenses are items bought to keep and use in a business, for example:
- business vehicles, for example cars, vans, lorries.
A business can choose to claim expenses based on its actual receipts or it may choose to claim simplified expenses if eligible. Simplified expenses are a way of calculating some business expenses using flat rates instead of working out the actual business costs. There are only certain businesses that can use this type of calculation.
Specific types of claimable expenses
The following covers some common but often overlooked areas:
S57 Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005), s61 Corporation Tax Act 2009 (CTA 2009) provides relief for expenditure of a revenue nature provided that the expense is:
- incurred in the seven years preceding the commencement of a trade, profession or vocation, is deducted from profits in the first accounting period; and
- not allowable as a deduction in computing the profits of the trade, profession or vocation but would have been so allowable if incurred after the trade had commenced.
Expenditure on food or drink for consumption by the trader
The cost of food and drink consumed, and accommodation used, by a trader is not, in general, an expense incurred wholly and exclusively for the purposes of the trade since everyone must eat in order to live, and such costs are therefore usually disallowed.
However, expenses incurred by a trader on food and drink whilst travelling on business will be allowable where:
- the business travel is, itself, allowable;
- the trade is, by its nature, itinerant or involves travel to a place only occasionally visited; and
- not as part of the trader’s normal pattern of travel for the trade.
Where a business trip by a trader necessitates one or more nights away from home, the hotel accommodation and reasonable costs of overnight subsistence are deductible.
Travel expenses connected with foreign trades
If an individual carries on a trade wholly outside the UK (a foreign trade), a deduction is allowable in calculating the profits of the trade for certain expenditure on travel, board and lodging incurred in connection with that trade, and which would not otherwise be allowable solely due to its failing to meet the ‘wholly and exclusively’ test.
If the trader’s continuous absence from the UK lasts 60 days or more, the expense of a journey made by his/her spouse or civil partner or by any child of his/hers between a UK location and the location of any of the trades in question, where that journey is made in order to accompany the trader, is also allowed. The deduction is limited to the expenses of two such outward journeys and two return journeys per person per tax year.
Incidental cost of loan finance statutory deduction in computing the profits of a trade applies to the incidental costs of raising loan finance which would otherwise not be an allowable deduction. Interest payments on a loan taken out for a business purposes are allowable for tax purposes. This includes overdraft interest, providing:
- the related bank account is a genuine business account;
- is not used to fund personal expenses.
No deduction is allowed for the repayment of the capital part of the loan. No deduction is allowed for interest on overdue tax. There are special rules regarding the incidental costs of raising loan finance for businesses using the cash basis.
Under s34 (1) ITTOIA 2005 expenditure is disallowed if it is not incurred wholly and exclusively for the purposes of the business in question. However, the existence of some non-business benefit arising out of expenditure does not cause it to be disallowed if, in fact, the expenditure is incurred exclusively for business purposes.
So, expenditure on the training and development of staff whose relationship with their employer is limited to the employment itself is allowable. However, costs for owners which are incurred in maintaining, updating and developing existing skills while qualified are allowable, because there is a direct link between the expense incurred and income received. The cost incurred in the acquisition of new expertise is not allowed. The cost of any CPD training is also allowable. For more detailed information please click here
Fees and subscriptions
An annual subscription to a body shown in the list, as approved by HMRC, is allowable.
HMRC will not allow a deduction for the cost of preparing an individual’s personal tax return. However, accountancy fees for the preparation of business accounts are allowable expenses.
A website that will directly generate sales, subscriptions, advertising or other income will normally be regarded as creating an enduring asset and consideration should be given to treating the costs of developing, designing and publishing the website as capital expenditure. Whilst a revenue deduction would not therefore be allowable, this capital expenditure will generally qualify as expenditure on plant and machinery for capital allowances purposes. Expenditure on initial research and planning, prior to deciding to proceed with the development of a website, is normally allowable as revenue expenditure. The regular update costs of the website are likely to be revenue expenses and so allowable for tax purposes.
If the business is not moving to a larger premises such expenses are allowed. However, if the business is moving to a significantly larger location, such that removal costs will be an ‘enduring benefit’ to the trade, the expenses are capital in nature and not allowed.
Fines and penalties
Penalties/fines for a breach of regulations, or as the result of a prosecution for a trader’s breach of regulations, will not be an allowable expense. However, payments for damages that are compensatory rather than punitive are tax deductible. That includes, for example, damages for defamation payable by a newspaper company, where such claims are ‘a regular and almost unavoidable incident of publishing’. Also, where an employer pays fines that are the liability of an employee, so that the employee is taxable on the payment as employment income, the cost to the employer of paying the fines is allowable in computing his/her trading profits.
Entertaining and gifts
Expenditure on business entertainment or gifts is not allowable as a deduction against profits, even if it is a genuine expense of the trade or business. However, if the total cost of all assets gifted to the same person in the same basis period is not more than £50, and the gift bears the business name, logo or a clear advertisement, and the gift does not include food, drink, or tobacco, it is allowed. The cost of staff entertaining is specifically allowed (ITTOIA 2005 s46).
A pension contribution by an employer to a registered pension scheme in respect of any employee will be an allowable expense unless there is a non-trade purpose for the payment.
One situation where all or part of a contribution may not have been paid wholly and exclusively for the purposes of the trade is where the level of the remuneration package is excessive for the value of the work undertaken by that individual for the employer, or the contribution is linked to the cessation of a trade. The deduction is for the period of account in which contributions are paid by the employer, and for no other period, unless either the deduction is required to be spread over a number of periods, or the deduction is allowed for an earlier period.
HMRC help sheet 222 – how to calculate your business profits
HMRC guidance for Simplified expenses
Article from ACCA In Practice