Turnover vs profit
When you run a business, you’ve got a turnover. That’s all the money you’re bringing in. Alongside that you’ve also got expenses – the cost of running your business.
Your turnover, minus any (allowable) expenses gives you your taxable profit. And this is what you pay taxes on.
So if your turnover is £45,000 and you claim £9000 in allowable expenses, you’ve got a taxable profit of £36,000 and that’s what you pay taxes on.
What are actual allowable expenses?
Office costs – this ranges from big expenses like the cost of renting an office to smaller things like stationery. It also covers phone, fax and internet bills, postage, printing, printer ink and some computer software.
Rents, rates, power and insurance costs – this includes rent for your business premises, business and water rates, utility bills, property insurance and security. If you work from home you can claim a proportion of these costs – but only for the parts of your home where your office is based.
Car, van and travel expenses – you can claim for vehicle insurance, repairs and servicing, fuel, parking, hire charges, vehicle licence fees, breakdown cover train, bus, air and taxi fares, hotel rooms and meals when you work away from your normal place of business.
Clothing expenses – this covers uniforms or protective clothing needed for your work, as well as costumes for actors or entertainers. Sadly you can’t expense your usual clothes, even if you wear them to the office.
Staff expenses – this includes staff salaries, bonuses, pensions, benefits, agency fees, subcontractors, employer’s National Insurance and training courses (if they’re work-related).
Reselling goods – this covers goods for resale, raw materials and the direct cost of making goods.
Legal and financial costs – You can usually claim for the hiring of accountants, solicitors, surveyors and architects for business reasons and also professional indemnity insurance premiums. You can also claim for bank, overdraft and credit card charges, interest on bank and business loans, hire purchase interest, leasing payments and alternative finance payments, for example Islamic finance.
Marketing, entertainment and subscriptions – this includes advertising in newspapers, bulk mail advertising, free samples and website costs.
Training courses – you can claim for most business courses, particularly if they are refresher courses for skills you already have.
The three golden rules
To fully understand if an expense will be allowable, it’s useful to consider the following three rules.
Wholly and Exclusively
- The expense must be wholly and exclusively for the purposes of carrying on that particular business. If it’s not, it won’t be allowed.
- If an expense is partly for the business and partly non-business then the business part must be separately identifiable – otherwise the deduction won’t be allowed. A good example is a motoring expense: if you’re using your vehicle for private and business purposes HMRC will accept a detailed mileage log showing your business journeys as evidence to support an expense claim for business mileage.
Capital vs Revenue
- This can get complicated! An expense will generally only be allowed if it’s revenue expenditure and not capital expenditure.
- The definition of what is capital and revenue is a tricky area of tax law but generally capital is defined as something of enduring benefit to your business – HMRC tends to say anything that will last in your business more than 2 years could be capital.
- Something is revenue expenditure if it’s an expense incurred as part of producing goods or services that your business provides (stock, materials etc.) or an expense incurred on items that are consumed to produce your business profits (energy, rent etc.).
- To make things even more complicated, something that’s capital for one business might be revenue for another. For example a van would be a capital expense for a builder but a revenue expense for a van dealer as it would be part of his stock. That’s why you should get professional advice if you’re not sure.
It can’t be specifically disallowed by legislation
- There aren’t too many expenses that are specifically disallowed, so the two rules above are the best guide. However, there are a couple of things you need to watch out for: entertainment and gifts (although some small gifts are allowed).
Keep track of your expenses
One final note for you: keep a record of all your business expenses – you don’t need to include proof of your expenses when you submit your tax return, but you may need to show it to HMRC if asked.