Every year, hundreds of thousands of business owners embark on the submission of their tax returns. While this may be daunting for a self-employed, first-time business owner, knowing the ins and outs of a tax return submission form will help you get over this hurdle easily. One of the form’s requirements involves a declaration of your allowable expenses.
But what are allowable expenses? And how can you tell them apart from other expenses? We take a closer look.
Allowable vs. disallowable expenses
In the world of tax return submissions, you will, by law, be taxed on your revenue and profits. However, there are some allowable expenses that can be deducted from your tax return that will not be taxed.
For example, if your business made £25,000 in revenue for the entire year and your business expenses were £5,000 for the same period, these expenses will not be considered and you’ll only be taxed on the remaining £20,000.
That being said, it’s important to distinguish between allowable and disallowable expenses. Allowable expenses are those which by definition are “wholly and exclusively” used for business purposes. Disallowable expenses are those which may not be factored in when submitting your tax returns.
Examples of allowable expenses
Allowable expenses generally fall into the following set of categories:
Running your business premises
This includes business property rent, property, and equipment repairs and maintenance, water heating systems and plumbing, business and water rates, utility bills, property insurance, insurance for your home office or studio (although this only applies for the areas where you work), building security, etc.
You cannot claim expenses for purchasing your business property or areas in your home which are used for general living.
First, for these expenses, it’s important to keep proof of payments and receipts in order to claim for them. They include: stationary; computers, laptops, and monitors; office furniture like chairs and desks; work-related software that is used within a year of purchase; printers; scanners; laminators; business phones and devices; postage and packaging for these items; and phone and internet bills held in the company’s name.
On the other hand, if you work from home and your phone/Internet bill is in your own name, you will be able to claim a percentage of it back as tax-deductible.
The list of tax-deductible tax costs includes wages and salaries, bonuses, pensions, employer’s national insurance (UK), recruitment costs, overtime and other expenses incurred because of unfilled job posts, training courses related to the business or job role of the employee, work uniforms, protective clothing and equipment, and childcare costs (limited to a certain amount).
However, keep in mind that you cannot claim for business attire or clothes that you wear to the office if there’s a no-uniform policy.
It’s important that you keep a log of mileage regarding your business journeys together with receipts if you’re working away from your standard business location or office. These receipts should be for: fuel and mileage, parking, train tickets, toll bridge charges, reasonable food and drink expenses (this is for those traveling from their home to a temporary workplace), repairs, maintenance, and servicing business vehicles, business vehicle MOT.
What is not reimbursed are travel costs, which make up a part of your daily commute, or daily expenses for food and drink.
Professional service and financial expenses
These include accountant or bookkeepers’ fees (alternatively, the cost of related software), solicitors’ fees, quantity surveyors’ fees, business loans fees, business credit card charges, business overdraft fees, and business bank charges.
What is considered a disallowable expense are fines or charges related to lawsuits. Further excluded from this list are the associated legal costs of purchasing your business premises.
Printing business cards and posters, building a business website, online advertising, and marketing costs and stock purchases to resell.
Other business expenses
Training courses related to your business, such as refresher courses; irrecoverable debts that have been written off; and depreciation and loss/profit on the sale of assets.
What if you incur an expense for both personal and business reasons?
What’s crucial to keep in mind at this point is that although it may seem hard to keep track of every expense, in the end, it will be worth it. It’s vital to ensure you know the difference between personal and business expenses as you cannot claim for the former. If you incur an expense for both personal and business reasons, say you use your telephone for both purposes, you’ll be able to claim only for the portion that was used for business expenses.
What if you live on your business premises?
If you’re a B&B owner or a freelancer who works and lives at your business premises, you can claim a deduction on a portion of your costs. For example, if you have one room in your house that’s a dedicated office, you can claim utility bills for that one room only by dividing the total for your house by the number of rooms it has to get to the amount for a single room that you use for business reasons.
With this short guide, we hope we’ve given you the right tools to determine your allowable expenses when it comes to submitting your tax returns. Allowable expenses are great for minimising your taxable revenue, but you also need to strike a fine balance between what you claim and what you do not claim for.
As mentioned earlier, it’s always wise to ensure you keep receipts and proof of payment if HMRC requires a closer inspection of your expenses. Although it may seem tedious, doing this will help you reduce any hassles further down the road.