9 September 2014 by Crystal HR & Payroll Ltd
There are two types of expenditure a business may have:
- business expenditure
- capital expenditure
This section will explain the difference between these two sorts of expenditure and give you a basic introduction to the type of expenses that you can claim.
This section will also explain about simplified expenses and how they could benefit you.
You can deduct the full amount of your allowable business expenditure from your business income to work out your taxable profits.
However, some expenditure is not allowable for tax purposes and some is only partly allowable.
Your own personal expenses, any money you pay to yourself (personal drawings), personal clothes or personal goods are not allowable.
If you buy something that is mostly used for your business, but you also use it personally, you cannot claim for all of it.
You must be able to separate the money you have spent for business and private purposes, and only the business part is allowable.
You must keep records to support this.
In the early days when I set up my business, I was spending a lot of money on different things and I didn’t know what business expenses I could claim to reduce my tax bill.
I realised that what I spent the money on affects whether – and how – I could claim tax relief for it.
I needed to separate the business expenditure from my private expenditure as it is only the business part that is allowable.
I have a mobile phone that I use for my business, I also use the phone to make private calls.
As I can only claim the cost of the business calls I make, I need to make sure that I keep records to support this.
I also need to make sure I regularly update my records and keep the information securely, as these records will help me to complete my Self Assessment tax return.
Business expenditure is the day-to-day cost of running your business, commonly referred to as running costs.
Generally, they are costs you pay for the sole purpose of earning business profits.
You must keep records of all costs so that you can justify your spending.
Let’s find out about the most common types of expenditure that you can claim as allowable expenses.
We will start with an expense that is common to most businesses – vehicle running costs.
Vehicle running costs
If you use your car or van for business you can claim the cost of any business journeys. You can work out the allowable business expenses by using one of two methods:
1. Mileage allowances
You work out how much you can claim by using a fixed rate for each business mile.
You will need to keep a log of the date of travel, destination, purpose of the journey, and the mileage covered.
You will not be able to use this method if your turnover is more than the VAT threshold.
2. Actual running costs
This is the second method you can use to work out your business motoring costs.
If you use this method you need to keep records of all your motoring costs, such as receipts for fuel, repairs and servicing etc.
You can only claim the costs that are for the business use of the vehicle.
To work this out you need to keep a record of your business mileage through the year, and take a reading of the total mileage of the vehicle at the start and end of your accounting period.
Wages, salary and other staff costs
If your business grows and you take on staff you can claim the cost of their wages, salary, commission, bonuses and employer’s National Insurance as allowable expenditure.
However, you can not include any money that you take from the business for personal use, such as your own drawings or the cost of your own National Insurance.
These are private expenses and therefore not allowable.
Rent, rates, power and insurance costs
If you have business premises, you can claim what you pay for rent, business rates, water rates, light, heat, power and any other business costs associated with those premises.
Many self-employed people do not have separate business premises and run their business from home.
You can claim a proportion of your utility bills based on the size of your home and how frequently you use it for business.
Utility bills include heating, lighting and council tax.
You must keep copies of your utility bills so that you can work out how much to claim for business use.
You can find further information and some examples at use of home examples
Repairs and renewals of property and equipment
You can claim the cost of repairs and any maintenance of your business premises.
However, improvements are not allowable, only like for like repairs.
Any repairs to parts of the premises that are not used for business are not allowable.
You can also claim the cost of repairing business equipment and replacing small tools.
Courtesy of HM Revenue & Customs