As an established small business owner, you’re juggling the day-to-day operations while managing your cash flow. You’ve got plans for growth, and knowing exactly where you can save on tax will give you a leg up.
Getting to grips with a few key concepts will help you recognise which expenses are tax-deductible, so you can effectively manage your finances and optimise your tax position. Before we consider ‘what expenses can I put through my business?’ , lets take a look at a few key concepts.
What does ‘tax-deductible’ mean?
Under UK tax law, the term ‘tax-deductible’ (or ‘allowable for tax’) refers to expenses a business can subtract from its taxable income when calculating its tax liability.
By deducting these expenses the taxable profit is reduced, resulting in a lower tax bill.
Not all expenses are tax-deductible. They must meet specific criteria, like being ‘wholly and exclusively’ for business purposes.
The ‘wholly and exclusively’ rule.
This is an important concept to familiarise yourself with when claiming tax-deductible expenses.
The ‘wholly and exclusively’ rule dictates that:
In order to qualify for tax relief, the expenses you incur must be wholly and exclusively for your business and must be necessary for its operations.
In other words, only costs directly related to your business activities and devoid of any personal benefit can be claimed as tax deductions.
If you follow that rule, you’ll ensure you’re accurately accounting for legitimate business expenses and reduce the risk of penalties or complications cropping up in tax assessments.
Tax-allowable examples
Let’s start off with the basics, looking at five tax-deductible expenses.
- Office supplies
Expenses incurred for essential office supplies like stationary, printer ink and paper.
- Travel expenses
Costs related to business travel, i.e. fuel, public transportation fares and accommodation, ensuring they are exclusively for business purposes.
- Professional services
Fees paid to professionals like accountants, lawyers or consultants for services directly related to your business activities.
- Marketing and advertising
Expenses associated with marketing and advertising efforts including website development, print ads and online advertising.
- Business insurance
Premiums paid for insurance coverage specific to your business operations, such as liability insurance or professional indemnity insurance.
Non-tax-allowable examples
Now let’s look at expenses which are not tax-deductible.
- Personal expenses
Expenses which are purely personal in nature, such as personal groceries, clothing or residential rent.
- Non-business entertainment
Costs incurred for non-business-related entertainment, i.e. tickets to sporting events or social gatherings unrelated to your business activities.
- Fines and penalties
Any fines, penalties or legal fees resulting from non-compliance with laws or regulations.
- Capital expenditures
Expenses related to the acquisition or improvement of assets that have long-term value for your business, such as buying a property or major renovations. These generally can’t be fully deducted in the year of purchase, but may be eligible for capital allowances.
- Private use of assets
If you use assets for both business and personal purposes, i.e. a vehicle or computer, you can only claim the portion of the expenses directly related to the business use. Expenses solely for personal use are non-deductible.
What expenses can I put through my business? If in doubt, ask your accountant!
Tax rules are intricate. HMRC have published a guide to expenses, but it is very detailed and requires professional interpretation. If you’re unsure whether an expense qualifies as tax-deductible, the best thing to do is to speak to your accountant.
We’re here to be the friendly face our clients can turn to for advice, so they feel confident they’re in the best possible tax position. To find out how we can provide that same support to your small business, get in touch by filling out our quick form.
