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As an accountant, there is always one question I hear from almost everyone. What business expenses can I claim? So, I'm going to run through it with you today. Whether you're already in business or if you're just starting, you should find this a helpful guide.
Firstly, please note I will be discussing business expenses for tax purposes. In some cases, you can have an expense that is allowed in the accounts, but not for tax. So to save complications, today we are talking about TAX-DEDUCTABLE expenses.
When looking at if something can be classed as a business expense, there is a key HMRC phrase that helps assess the expense.
Is the expense "Wholly and exclusively" for undertaking the business activities?
Let's break down what this means:
Wholly. Is the whole amount of the expense (in currency, not quantity) for the business?
Exclusively. Is the purpose of the expense, only for undertaking business?
Both of these criteria need to be met to classify something as a business expense.
This means if the cost of the expenses and the purchase of the expenses was 100% for the business and was part of carrying out business activities (or from trying to attract more business), and you couldn't reasonably undertake (or grow) business without the expense, it would be an allowable expense for tax purposes.
Some examples of common allowable expenses include:
Employee salaries and related cost
Rent and rates for business premises
Cost of goods sold
Advertising and marketing costs
Uniforms, branded and safety workwear
Professional fees, such as legal and accounting services
Repairs and maintenance of business equipment
Travel expenses for business purposes
Insurance costs
Bank charges and interest on business loans
Professional subscriptions from the approved list
There are also some expenses that are not allowed and these are things like:
Business/client entertainment
The repayment of loans taken out personally to help run the business
The depreciation of assets
Personal drawings including payments for self-assessment tax and National Insurance (these are personal expenses and NEVER business)
Charitable donations (these can give certain tax relief though so keep records of them)
It is a common misconception that "client entertaining" is allowed. I think this stems from lots of American movies where they wine and dine their clients, however in the UK tax system, this is not an allowable business expense for tax purposes.
Another HMRC phrase we need to bear in mind is "Duality of purpose".
There are also a variety of expenses that, because of their nature, have a duality of purpose and are not allowable business expenses. These include:
ordinary ‘civilian’ clothing
having somewhere to live
wishing to enjoy good health, e.g. gym memberships and chiropractor visits.
wanting to avoid a criminal conviction
This is the case even if there are business reasons for making the expenditure. Dual-purpose expenditure is an expenditure that is incurred for more than one reason. If even one of the reasons is not for business purposes, the expenditure fails the test and the expense is not allowed to be classified as a business expense.
There are exceptions to the dual-purpose expenditure if there's a clear part that is identifiable as "wholly and exclusively" (like business calls that can be identified on a phone mobile personal mobile phone bill) but this is a rarity, so should not be used in most circumstances.
In most of the bullet points above, this has been set by "case law", where a court case/tribunal has ruled in a certain way and that is now the benchmark in all cases going forward.
One such case law was around clothing, and it was the case of TC06640: G Daniels v HMRC [2018] UKFTT 462 (11 July 2018).
G Daniels was a self-employed dancer who performed at Stringfellows nightclub in central London and HMRC assessed additional tax for two different tax years, on the basis that she had claimed excessive business expenses.
Essentially, the dispute was based on the deductibility of G Daniels expenses, which included items of clothing, lingerie and dry-cleaning, which she had claimed in her tax returns.
HMRC tried to use the ruling of another case as a basis for disputing her claims, where a barrister tried to claim for formal clothing which she was required to wear to court (suits, shirts etc). In that case, it was ruled that the clothes were not wholly and exclusively for business as they could be worn outside of a courtroom.
However, in the case of G Daniels it was argued, successfully, that the clothes she wore while dancing at Stringfellows "were not appropriate to be worn outside of the club", unlike the barrister's court clothes. This meant there was no duality of purpose, and those particular expenses were ruled to be allowed in her case.
Remember: Wholly and Exclusively
So as you can see, it is not always a clear-cut line on what constitutes a business expense, but if you go down the route of ensuring your expenses are "wholly and exclusively", you will likely be on the right side of an HMRC tribunal if that were ever to happen.
You can read more here on the HMRC guidance for business expenses and specific deductions here
Disclaimer: The information provided for business expenditure and dual-purpose expenses are not exhaustive and many other expenses may be considered allowable or disallowable, depending on the circumstances. It's important to keep accurate records of all business expenses and to check with HM Revenue & Customs for more information on what is and is not considered an allowable expense
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