One of the principal aspects of the tax calculation of any entity is to know its taxable income. The process of estimation of taxable income involves two essential elements- total earnings and allowable expenses. Operating a business requires spending on multiple forms of expenditures. Every business entity needs to have a meticulous comprehension of all the business expenses which it can claim for tax purposes. A critical part of optimizing your tax liability is determining the allowable tax expenses of your business appropriately.
Countries around the world have outlined various rules regarding the treatment of business expenses for tax purposes. In the UK, the HMRC has also specified the regulations to recognize business expenses incurred by multiple entities for tax purposes in the country.
If you are a self-employed taxpayer in the UK, an in-depth apprehension of the different tax expenses is necessary for your entity. Let us enlighten ourselves about some integral aspects of business expenses that are allowable for tax purposes in the United Kingdom.
Business Expenses- Meaning
Outflows or costs directly or indirectly attributable to the ordinary trade operations of any business entity are categorized under the broad head of business expenses. There are different types of business expenses which an entity incurs during any given period.
Significant categories of business expenses
The two primary categories of business expenses are revenue and capital expenses.
- Revenue Expenses
The revenue expenses are the most recurring form of expenditures for any business. These expenses cover those payments, which a concern pays entirely and exclusively with the motive of conducting the operational activities of the business. Revenue expenses need to be incurred quite frequently, on a diurnal basis. The benefits derived from such spending last for a shorter duration. Some instances of revenue expenses include the purchase of raw materials, wages, and power expenses.
- Capital Expenses
Capital expenses are costs that a business spends to acquire long-term assets for the entity. They bring enduring usage for the entity as they usually entail an investment of a more considerable sum. Capital expenses are mostly not allowable for tax purposes. However, capital allowances are exceptions to the rule. One can claim depreciation on capital assets as a deductible expense. Common examples of capital expenses are the purchase of office space and the acquisition of machinery or equipment.
Allowable expenses for tax purposes in the UK
Allowable expenses are those expenses that a business explicitly incurs for carrying out its different business activities. They are deductible from the revenue of the entity for tax calculation. Most revenue expenses which are traceable to the business operations of the entity are allowed as tax-deductible expenses. Capital expenses, in the form of capital allowances, also qualify for a reduction from the total income for tax estimation.
Major variants of tax-deductible expenses for businesses in the UK
Here, we have enlisted some of the prominent groups of allowable expenses in line with the HMRC guidelines.
- Insurance, power, rent, and rates
These include rent of business premises, security overheads, heating cost, power, insurance premium, utility bills, business and water rates.
- Salaries, wages, and other employee expenses
The notable expenses under this group are salaries, pensions, employee benefits, staff training costs, bonuses, and employers’ payment as part of the National Insurance Contribution. Expenses for clothing and staff welfare, such as first aid and employee uniforms, are also allowable.
- Office Expenses
This group covers costs related to phone, fax, internet, stationery, software system, subscriptions, and courier services.
- Marketing Expenses
It comprises payments on advertising in newspapers and magazines, business websites, online ads, and paid listings.
- Fees paid for professional services
The expenses covered under this group are fees to architects, accountants, lawyers, and other professional service providers.
- Charges related to banking and financing activities
Typical costs under this head are loan interest and lease charges, overdraft charges, bank credit card expenses, miscellaneous finance costs.
- Motor vehicle and travelling costs
This group’s expenses consist of fuel and repairs, vehicle insurance, bus or train fares, charges for meals and accommodation on business trips, and hire charges.
- Capital Allowances
In some cases where an entity uses the traditional accounting method, it can claim capital allowances for capital expenditures to get tax relief. The capital expenses include purchasing assets for business use, such as machinery, business vehicles, and equipment.
Deductible expenses for self-employed taxpayers working from home
A self-employed individual who is working from home can claim some costs as tax-deductible expenses. In the wake of the present COVID-19 crisis, many business owners are working from home. The expenses incurred while working from home can be claimed proportionately. One needs to formulate a reasonable basis to divide the costs between their business and personal expenses. For example, the space used for business activities or the amount of time spent working from home. The expenses covered under this category comprise costs such as electricity, council tax, mortgage, rent, interest, heating charges, and phone bills.
Disallowed expenses for businesses
It is imperative to understand that not all business expenses are allowable for tax purposes. Some costs do not fall within the ambit of tax-deductible expenses. Those overheads which are attributable solely for personal purposes of the self-employed taxpayer get disallowed. The list of disallowed expenditures comprises the following:
- Political donations
- Repayments of loans personally borrowed and invested in the business
- Penalties and fines due to non-compliance with any rule or regulation.
- Business entertainment expenses
- Gifts for charitable purposes made in business name exceeding £50.
In the case of expenses attributable to both business and personal purposes, one can deduct only proportionate business costs.
Process of claiming business expenses for tax purposes
It is vital to duly make claims for allowable business expenses to minimize your business entity’s overall tax liability. It is crucial to maintain accurate records related to all business expenses incurred in a given tax period. These business records act as evidence of the actual expenditure of the entity.
Depending on your entity’s turnover, the self-employed taxpayer has to disclose the expenses to the HMRC in his self-assessment tax return. For the year 2019-20, if your entity’s turnover does not exceed £85,000, you do not have to provide an actual list of expenses in your return. One needs to add up all the allowable expenses and mention the figure in the self-employment pages of the tax return. Self-employed individuals who have a turnover exceeding the threshold of £85,000 have to show all the actual expenses grouped in required categories in the self-employment pages section. It is advisable to keep the necessary details for all the costs claimed. The HMRC has the authority to make enquiries demand details related to any of the expenses.
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