The level of personal and corporation tax you pay to HMRC is based upon the calculation of your annual profitability – profit is the amount you’ve made in sales minus what you’ve spent during the year.
However, you can’t include every product or service that your business has spent money on in that figure – you can only “claim on” or “deduct” costs which were “wholly and exclusively” incurred for the purposes of running your business. But what does “wholly and exclusively” actually mean?
In this article, The Financial Management Centre covers:
- everyday expenses
- whether IT costs are reclaimable or not
- claimability of work clothing
- can you deduct legal fees from profits?
- your annual entertainment allowances
If you can demonstrate that you needed to purchase a product or a service to run your business and that the product or service you purchased has no other use (for example, personal), you will be able to claim that the expense was incurred “wholly and exclusively” for the purposes of running your business.
Everyday examples of these types of expenses include:
- IT costs (computers and software used in your business premises)
- Travel costs (petrol, taxi services, and train tickets on business-related journeys that do not form part of your commute from home to your place of work)
- Clothing expenses (uniforms for your staff)
- Staffing costs (wages, salaries, or freelancing costs)
- Insurance costs (public liability, professional indemnity and so on)
- Costs of occupying your business premises (rent to your landlord, interest on your commercial mortgage, non-domestic business rates, and so on)
- Advertising or marketing (website costs, data purchases etc.)
So far so clear? Let’s look again at some of the costs…
IT – claimable or not?
There is uncertainty around some IT costs that businesses can claim for. HMRC will generally consider all IT-related costs under £500 as a deductible business expense (also known as revenue expenditure).
However, if you pay more than £500 for any item of IT-related equipment (software included), you will probably have to place that expense in your capital expenditure column.
You have an annual allowance of £1,000,000 to purchase capital equipment until 31st December 2020. If you purchase this new IT equipment and you have already spent over your annual allowance within that year, you may have trouble persuading HMRC that you can claim it as revenue expenditure.
TFMC note – revenue expenditure can be used to lower the level of taxable profit of your business, capital expenditure can’t.
TFMC note – for sole traders and partnerships whose turnover is less than £150,000 a year, accounting on a “cash basis” may be more suitable for you. Please get in touch with us to find out more.
What if you buy a laptop for your business and you also use it personally? If you do so through a limited company, you will have to pay National Insurance Employers’ Contributions on the value of the laptop. If you are a sole trader, it will be classed as a benefit-in-kind on which you have to pay personal tax.
Clothing – claimable or not?
Clothing can sometimes be a grey area. HMRC’s definition of a uniform is "a set of clothing of a specialised nature that is recognisable as a uniform and is intended to identify its wearer as having a particular occupation” (HMRC EIM32475). Think about a construction site and the builders wearing fluorescent helmets and steel-toe-capped boots as an example. HMRC would likely have no problem classifying these items as being “wholly and exclusively” necessary for the purposes of running your business.
However, for example, if your company has just won an award and you choose to buy a £500 suit or dress to receive your trophy at the related gala dinner presentation, this would not be allowable because you could then use this suit or a dress for purposes that are not business-related – for example, on a night out.
Legal fees – claimable or not?
You can consider legal fees incurred in the collecting of debt, employment advice, rent reviews, trade disputes, and lease renewals as costs which can be included in the calculation of taxable personal or corporate profit.
But if you spend money with solicitors when successfully merging with or acquiring another firm, buying new property, or acquiring a new lease for your company’s premises, then they are considered capital expenditure and therefore are not claimable.
Annual entertainment allowance
The rules on claiming entertainment as an allowable business expense are generally quite strict – in most cases, the argument you might make in claiming that they are allowable will not be accepted by HMRC. Most business lunches where you take a client out to a nice restaurant to talk over business are not claimable.
However, for each member of staff in your company, there is an annual £150 exemption on entertainment – specifically on company events like a Christmas party. You must stick strictly to the £150 limit – if you spend over that, then the entire amount then becomes liable for both forms of national insurance and income tax. VAT is reclaimable on these events for any employee except if you’re the only employee of your company.
Within the £150 limit, anything related can be claimed from hotel stays, travel, drink, and food – in fact, any activities jointly involving the staff.
Directors are also entitled to £300 worth of “treats” every year – these withdrawals are not subject to tax and National Insurance when the treats themselves are not paid in cash or in vouchers. For each individual treat, no more than £50 can be spent and these treats can be claimed against your level of profitability so that you can reduce the corporation tax that your company pays.
Get in touch
If you want to know more about the expenses you can legitimately claim back on, or you’re concerned that there may be a wrongful claim in a previous year’s accounts you want help with, talk to our expert advisors today on 0800 470 4820 or email firstname.lastname@example.org.