What is a business expense?
There are a lot of costs involved with running a business, from advertising to raw materials, stock and professional fees – a whole plethora.
It’s important to know what you can claim as a tax deductible expense in your business, so you can ensure you’re claiming everything and, therefore, being as tax efficient as possible. You shouldn’t pay any more tax than is necessary because something was missed off a tax return.
Different rules apply to what you can claim, based on whether your business operates as a Sole Trader business, or a Limited Company.
A cost is a business cost if it was incurred ‘wholly and exclusively for the purpose of trade’ – that’s HMRC’s description.
Sole traders
Sole traders will deduct expenses from their sales to arrive at a taxable profit that is then recorded on a self assessment.
You and your sole traders business (if you operate this way), are the same legal entity, so you can share some costs, such as telephone, car and working from home, between you and the business.
Some costs will be incurred wholly for the business, and will be 100% tax deductible.
Limited Companies
Limited companies will incur costs wholly and exclusively for the purpose of trade, and those costs must be invoiced to the company in the company’s name – not in your name! If you have software subscriptions or mobile phone bills in your name, not the company’s, they aren’t a business cost.
You and your limited company are separate legal entities, and can’t share costs!
There are some nice to haves that can be claimed via limited companies though, such as mobile phone costs (which are a tax-free benefit in kind for employees – that’s you), trivial benefits and pensions payable on employees’ behalf (that’s you again).
Limited companies’ deduct their business expenses to arrive at a taxable profit for the business, that’s then reported to HMRC via their corporation tax return.
Anything you take out of the business is taxed personally against you, separately to the business’s tax.
Expense versus Capital Cost
When a business, of any entity type, buys a costly asset – something the business will get multiple years of use from – it’s classed as a capital cost, or asset, rather than a normal business expense.
Assets are usually things like vans, plant and machinery, computer equipment, office equipment etc.
Capital allowances are HMRC’s rules for how assets are taxed. For qualifying assets, the annual investment allowance is available, which allows 100% of the cost of the item to be deducted from the tax return, up to a certain limited.
Here’s some more information on HMRC’s capital allowances rules.
What can you claim?
So, what can you claim as a business cost? Here’s some examples for you:
Office Costs:
- Printing, postage and stationery
- Rent, rates, energy
Travel Costs:
- Train, bus or air fares
- Fuel
- Parking
- Accommodation
- Subsistence
Staff Costs:
- Salaries
- Pensions and national insurance – employer’s cost
- Training
Direct Costs:
- Goods purchased for resale
- Raw materials
- Cost of making products to sell
Professional and Financial:
- Legal or other professional fees
- Accountancy fees
- Subscriptions – to professional bodies
- Insurance
- Interest paid
- Bank or credit card fees
Marketing:
- Advertising costs
- Website costs
For a full list of what’s tax deductible for your business, ask your accountant, or have a Discovery Call with us – we can help you make sure you and your business is tax effective.