In the day-to-day course of running your business, you naturally accrue expenses that are required to produce your product or deliver your service.
As a rule of thumb, almost any expense that can be directly tied to making it possible for you to run your business can be considered a business expense. Does that mean you can go buy yourself a yacht with company funds, throw a party on it for your employees and then notch it up to “business entertainment” costs?
The Clear-Cut Business Expenses
Some business expenses are cut-and-dry and don’t require an expert to determine if they are truly deductible from the business’s profits.
Such clear-cut expenses include:
- Business banking charges
- Business heating
- Business lighting
- Employee salaries
- Subcontractor and freelance fees (also “gig” fees for gig-services delivered to the business, such as those obtained on Fiverr)
- Business travel costs (more on this below)
- Day-to-day office costs such as paper, printing toner, broadband, business phone contracts, and so on.
- If your employees wear uniforms, you can deduct these if you provide them for employees.
- Raw materials required for producing the business’s product
- Staff training
- Business insurance charges
- Marketing and advertising costs (web banners, PPC, printed marketing material, social media marketing, etc.)
- Rent on business properties
- Business rates
Childcare — under certain conditions
Childcare is not considered a valid business expense because it is not directly linked to the daily running and management of a business. However, a limited company can obtain tax relief from childcare fees if they are paid via childcare vouchers up to a total of £243 per month.
Unfortunately, the childcare vouchers scheme is now closed to new applicants.
Home Office Costs
If your office is your home, you can claim a percentage of the home’s utility bills as expenses.
Please note that simply “Working from Home” during the lockdowns doesn’t necessarily mean your office is your home. But you can indeed claim certain WFH costs for yourself and your employees as a result of the COVID-19 lockdowns.
Unacceptable Business Expenses
Certain items will not be accepted by HMRC as a valid business expense and so will not be taken off your taxable income. These items include:
Believe it or not, but hosting a throwdown bash the likes of those seen on The Wolf of Wall Street are not tax-deductible — at least not when you throw such parties for your clients.
If you wanted to go as bonkers as Willy Wonka entertaining your employees for their dedication and hard work, by all means, be our guest. That’s tax-deductible.
Although, if you purchase a £2 million yacht to hold the party, be advised that you will not be able to deduct the full price of that yacht as an expense. The yacht would be entered as a Capital Asset and its depreciation cost worked out over its “useful life” can be set off against taxable income per annum. (If it sounds complicated, it is a little bit. But if you can afford a yacht, you can probably afford a trusty accountant to help you with such things as well.)
Gifts for clients
Believe it or not, but these are not actually tax-deductible. HMRC considers these to be the same as “entertaining” if they cost more than £50. (You can claim it as an expense if it’s below £50, but only if it doesn’t have your logo or any other advertising copy on it.)
Alas, if you’re speeding down the M20 at 160 mph so you can get to that all-important meeting with a client, HMRC will not recognise any speeding fines you accrue as a valid tax-deductible expense. The same goes if you double-park in London to make it to the meeting on time.
They will, however, recognise a planner as an expense so you can keep track of your appointments and their times better in the future!
Non-Gift-Aid Charitable Donations
The two-or-three quid you throw to a homeless person sitting at Picadilly will not be tax-deductible — sorry.
If, however, your two (or twenty) quid reached that homeless person via a Gift Aid donation then, yes, that charitable donation would be tax-deductible.
Acceptable Business Travel Costs
As a general rule, something must be entirely a business cost for you to be allowed to claim it as an allowable expense. If you fly over to the Seychelles to meet a client, but then stay an extra three days to soak in the sun on a private boat at Anse Lazio, those additional three days would not be tax-deductible. (And nor would the hire-fee for the private boat!)
As for the business trip itself, you can claim the accommodation costs, food and drink costs as well as travel and subsistence costs.
When in doubt, speak to your accountant
The more “grey-area” expenses you have, the more likely an accountant can help you save costs. If your expenses run to many thousands of pounds a month, hiring an accountant is essential. And it will probably end up paying for itself.
Whatever you do, it’s vital to keep your records and bookkeeping up-to-date and to file all your receipts and invoices. Digitally filing them also ensures that you’ll have a backup should anything go wrong with the original copies.
Shoaib Aslam is the co-founder of Pearl Chartered Accountants, a UK-based chartered accountancy firm that has multiple locations across London. They are experts in helping startups and established businesses with all aspects of growth, strategy, scaling up, accounting and tax planning.