Not all business expenses that you incur running your business can be deducted against your income for tax purposes. ‘Allowable’ expenses are those which you can deduct against your trading income to calculate the profits on which you will pay tax.
Which business expenses are allowable?
For a business expense to be allowable, it must have been incurred ‘wholly and exclusively’ for the purposes of your business. If you pay for something that is partly for business and partly for a private purpose, then the expense should be apportioned between the two. For example, if you pay for a telephone bill where you have made both business and personal calls on one bill, then you need to apportion the total cost between the business element and the private element. The business part will be an allowable expense and can be claimed against your trading income.
What is a disallowable business expense?
Not all business expenses are allowable for tax purposes. Any expense that is incurred wholly for a private purpose is a disallowable expense and cannot be deducted against your trading income when calculating your taxable profits.
Some business expenses that you incur may be allowable, but are a capital rather than revenue for tax purposes. Capital expenses cannot be deducted against your trading income, but may qualify for Capital Allowances instead.
What is the difference between a capital and revenue expense for tax purposes?
A capital expense is usually, but not always, a larger item of expenditure on something that you would expect to last for a reasonable amount of time, perhaps a year or more.
A revenue expense is something that lasts for a shorter period of time and is usually used up in your day to day business activities. For example, paper or ink for your printer. Most of your regular business expenses are likely to the revenue expenses and allowable for tax purposes.
This sounds complicated how will I know which expenses are allowable?
HMRC have produced a helpful guide (Help sheet HS222) called How to calculate your taxable profits. This help sheet contains a useful table of some of the more common allowable and disallowable expenses.
If you’re not sure and need help completing your tax return, we would be happy to help.
Tax doesn’t have to be taxing and our simple fixed fee packages take the stress out of Self-Assessment.