Of all the issues that are discussed on business training courses, allowable expenses are always a hot topic, resulting in many lively debates!
How it works
In simple terms, if your total income is £40000 and your allowable expenses are £10000, then you have a net profit of £30000. This would be the base figure for calculating your tax. Capital Allowances (for equipment you have purchased, e.g. a commercial vehicle, can reduce this further)
One important fact is the misuse of the word “claim”. When we talk of “claiming” something back from the tax man, the reality is that it doesn’t happen at all. We are simply allowed to list our “claims” or expenses, which reduces the net profit – the result is, you pay less tax without actually “claiming any money back”
Everything works on what HMRC considers to be “fair and reasonable”
Remember we are taxed on a system known as “Self Assessment” – you send very little information to the tax man (certainly not your receipts or bookkeeping records). As a result we must understand what we can include on the tax return and what we cant. HMRC will assume you have only claimed what is allowable. Any discrepancies would probably only be picked up during any tax inspection, so it is very important to get it right.
The obvious expenses would include office rent, utilities, travel, branded or specialised (safety) clothing, staff costs, interest on loans / overdrafts, advertising and professional fees. These are often easily identifiable, and readily understood as being “fair and reasonable” costs. The useful HMRC link below, clarifies this.
What about stock?
If you buy and sell things then your stock, or materials, only becomes a cost to you once you no longer have it! This means you have either sold it, damaged it, had it stolen, or had to throw it away. It has then become and expense. Purchasing stock is not an allowable expense – this is because when you buy stock, you simply replace the asset of cash with the asset of stock – until you sell it, it’s still yours, so it wont be deemed an expense. Join one of our Business Masterclasses and we will make it easy to understand.
Running your business from home
If you work from home then it is only “fair and reasonable” that you can include expenses for light and heating for example. This has to be estimated of course, as it would be difficult to determine the exact expense of running an office within your home. You could work out your total household expenses and apportion part of it to your office, depending on how many rooms you actually had. However I favour the simplified allowance which is based on the number of hours you actually spend in the office.
Using your own Car
Similarly, there is a simplified method of calculating you cost if you use your own vehicle. It is based on the number of business miles you actually do. It is a figure which is deemed to include all the costs of running the vehicle and simply apportions it for business use. Hence you only “claim” the “pence per mile” figure and do not include any of the other costs
Find more information regarding expenses here: https://www.gov.uk/capital-allowances