First published 21 June 2018 • Updated 21 June 2018
As HMRC will tell you, it’s important to pay the right amount of tax. But that rule cuts both ways – you shouldn’t be paying tax on things that are legitimate business expenses.
If your business needs to spend money on something in order to run properly, then this may count as a tax-deductible expense. These expenses can lower your overall tax bill, and indeed can be a vital part of both cash-flow planning and improving your operating margins.
Taking advantage of tax-deductible expenses requires effective bookkeeping and financial reporting, as well as a good knowledge of the expenses that qualify.
What are tax-deductible expenses?
Businesses often have to spend a lot of money before they can make money. For instance, if you run a delivery company that requires a fleet of vehicles, you’ll need to buy these vehicles, fuel them and keep them roadworthy – all of which will cost money. As your business couldn’t run without these vehicles, the money you spend on them isn’t taxed. Those costs are therefore deducted from the business’s gross income before that is subject to tax.
So if the business took £32,000 in the last year, but had £6,000 worth of tax-deductible expenses, only £26,000 would be taxed.
What expenses can I claim?
A great many expenses are potentially tax-deductible, depending on the nature of your business and its ongoing requirements. Here are some of the common ones:
- office costs (e.g. phone and broadband bills)
- travel costs for work travel (e.g. petrol, transport fares)
- clothing expenses for uniforms or protective outfits
- salaries and subcontractor costs
- stock and/or raw materials for resale
- financial costs such as bank or insurance charges
- heating and lighting your business premises
- business rates
- advertising and marketing costs
All such expenditure must be made solely for business purposes rather than personal use (although sometimes the line is blurred, such as when you work from home and claim for energy bills). Expenses must also be rigorously documented if you want to claim back tax on them, so encourage this practice among your staff and ensure all receipts are kept and sent to your accountant.
A few business costs are not tax deductible. These include any legal costs that come from breaking the law (including parking tickets), and you also can’t claim on the legal costs that come with buying a new property. And although work-related travel costs are covered, travel between your home and your workplace is not. Finally, despite what you may have heard, entertainment costs such as taking clients for dinner are also not tax deductible!
What expenses can I claim if I work from home?
If you work from home, the rules are applied slightly differently. You’ll still be able to claim expenses such as heating, electricity, council tax, mortgage interest / rent, internet and phone usage, but only for the proportion that you use for your home office.
There are several different ways to work out the correct proportion. One method uses the number of room in your home; so for instance if your home has five rooms, one of which is your office, one-fifth of your heating bill may be tax-deductible. However, you should ask your accountant about the best way to work this out, to avoid over-claiming or under-claiming.
How do I claim my tax-deductible expenses?
Once you have all purchase records for the year and can prove how much you have spent on your business, it’s time to make the claim. You do this through your annual self-assessment tax return. You won’t need to submit your records when you submit your tax return, but you should keep them ready as HMRC may ask to see them.
If you have more than a few business expenses to keep track of, it’s usually more efficient to have an accountant to take care of your bookkeeping.
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