I am asked quite often whether a business expense is ‘ok’. Let’s clarify…
If you are a sole trader (i.e. you are self-employed), the law does not distinguish your business from you personally. There is no Board of Directors, no shareholders – only you. As an individual, you can pay for whatever you like. The significance of ‘allowable’ business expense is in the context of the tax computation. Tax is levied on business profits, and in calculating profits, only certain expenses are allowable – the others are, in effect, ‘owner’s drawings’.
Your accountant will be eternally grateful if you are able to keep your ‘allowable’ business expenses in your business books, and non-allowable in your personal accounts – although I admit this is not always possible. To help you decide which is an ‘allowable’ business expenses, HMRC have helpfully produced a list, with some examples!
| Category | Allowable Expenses | Non-allowable Expenses |
| Accountancy, legal and other professional fees | Accountants, solicitors, surveyors, architects and other professional indemnity insurance premiums | Legal costs of buying property and large items of equipment; costs of settling tax disputes and fines for breaking the law |
| Advertising and business entertainment costs | Advertising in newspapers, directories etc. mailshots, free samples, website costs | Entertaining clients, suppliers and customers; hospitality at events |
| Bank, credit card and other financial charges | Bank, overdraft and credit card charges; hire purchase interest and leasing payments. Alternative finance payments | Repayment of the loans or overdrafts or finance arrangements |
| Car, van and travel expenses | Car and van insurance, repairs, servicing, fuel, parking, hire charges, vehicle licence fees, AA/RAC membership; train, bus, air and taxi fares; hotel room costs and meals on overnight business trips | Non-business motoring costs (private use proportions); fines; costs of buying vehicles; travel costs between home and business; other meals |
| Communications, stationery and otheroffice costs (mobile, internet, email costs) | Phone, mobile, internet, email and fax running costs; postage, stationery, printing and small office equipment costs; computer software | Non-business or private use proportion of expenses; new phone, fax, computer hardware or other equipment costs |
| Construction industry – payments to subcontractors | Construction industry subcontractors payments (before taking off any tax) | Payments for non-business work |
| Cost of goods that you are going to sell or use in providing a service | Cost of goods bought for resale, cost of raw materials used, direct cost of producing goods | Cost of goods or materials bought for private use; depreciation of equipment |
| Depreciation and loss/profit on sale ofassets | Depreciation and loss/profit on sale of assets are not allowable expenses – any amount entered here should also be shown in box 43 of the tax return | Depreciation of equipment, cars etc. Losses on sales of assets (minus any profits on sales) |
| Insurance policy | Costs of any business-specific policy | Recoverable costs |
| Interest on bank and other business loans | Interest on bank and other business loans. Alternative finance payments | Repayment of the loans or overdrafts, or finance arrangements |
| Irrecoverable debts written off | Amounts included in turnover but unpaid and written off because they will not be recovered | Debts not included in turnover; debts relating to fixed assets; general bad debts |
| Other business expenses | Trade or professional journals and subscriptions; other sundry business running expenses not included elsewhere | Payments to clubs, charities, political parties etc.; non-business part of any expenses; cost of ordinary clothing |
| Rent, rates, power and insurance costs | Rent for business premises, business and water rates, light, heat, power, property insurance, security; use of home as office (business proportion only) | Costs of any non-business part of premises; costs of buying business premises |
| Repairs and renewals for property and equipment | Repairs and maintenance of business premises and equipment; renewals of small tools and items of equipment | Repairs of non-business parts of premises or equipment; costs of improving or altering premises and equipment |
| Wages, salaries and other staff costs | Salaries, wages, bonuses, pensions, benefits for staff or employees; agency fees, subcontract labour costs; employers’ NICs etc | Own wages and drawings, pension payments or NICs; payments for non-business work |
List reproduced from http://www.hmrc.gov.uk/factsheets/expenses-allowances.pdf
Further guidance is available at http://www.hmrc.gov.uk/incometax/relief-self-emp.htm