Strict rules govern what can and cannot be counted as a business expense when calculating profits and knowing what to claim against your business is vital. Below is a list of many business expenses allowable, plus those that are not, but as each company is different it is important to speak to a qualified accountant for your businesses’ specific needs.
Allowable expenses include the cost of goods or materials bought as stock and then resold, rent and running costs for premises, marketing costs, costs of travel to see customers, (petrol, rail and plane receipts, car running expenses including garage repairs etc.) financing costs, such as bank charges and interest payments and general running expenses such as postage stationery and telephone. If you work from home a certain proportion of heating, electricity and council tax costs are allowable.
To claim any of the above as business expenses you need to keep receipts, invoices and records. This is where a disciplined accounting system can help enormously. All income and expenditure needs to be backed up with records in order for you to fill in your tax return each year and pay the correct amount of tax. And there are many businesses which pay too much simply because they have mislaid or forgotten about receipts for large purchases.
Keeping good tax records is not only essential for your own benefit, but it is also the law. Everyone must keep records of their income, capital gains and expenditure for at least 22 months after the end of the tax year to which they relate so they can fill in a Tax Return fully and accurately. Everyone in business, such as the self-employed and partners, and those letting property, must keep their records for at least five years and ten months after the end of the tax year to which they relate.
Keeping good, well organised records make it easier to complete your tax form, so keep all records in one place. Keep every relevant piece of paper, including bank statements, cash transaction records, petrol receipts, tickets etc. Note everything down and once a week or month sit down with the receipts, invoices and bank statements and go through them. Many people initially employ a book-keeper to separate all the receipts under different expense headings, and check on incomings and outgoings on bank statements. All paperwork must then be filed – using an Excel spreadsheet is an excellent way to keep everything on track. Enforcing a systematic routine means the business gets a regular (usually monthly) breakdown of income and expenditure, and it means less work (and therefore expense) for your accountant at the end of the year. Book-keeping and accounting costs are also tax deductible.
Costs which are not allowed are also varied. These include personal expenses such as travel to work, clothes or living expenses, entertaining clients and fines such as speeding tickets and parking tickets (bad luck).
There are other costs which are not allowed as a business expense but come under the capital allowance system and help to reduce your tax bill over a longer period. Capital allowances are reliefs on business equipment such as computers, cars, tools or furniture that you intend to keep. The cost of buying certain equipment or premises (and any reduction in the value following purchase) can be claimed as capital allowances and a proportion of these costs are deducted from the business’s taxable profits over several years.
Rates of capital allowances vary. The main rate for equipment is 25%, although small and medium sized businesses can claim 40% in the year of purchase. Alter the first year the allowance reverts to 25% on the remaining costs of the purchase and continues yearly.
If you are buying industrial buildings the capital allowance is 4% and you take this proportion of the original cost of the buildings from your profit before tax in both the first year and in subsequent years.
There are other special schemes that increase the rate of capital allowances in the year in which equipment is purchased, and these vary according to the decisions made by the Chancellor of the Exchequer each year. At present special schemes include tax reliefs for small to medium businesses to invest in research and development, direct investment incentives which offer tax incentives and computer loan relief for employers. Under the computer loan relief scheme you do not pay National Insurance contributions on the value of any computer worth up to £2,500 that you lend to an employee.
