Posted 3 months ago by Alison
In order to accurately prepare your tax return, it's important to know what counts as an allowable expense, and is therefore tax-deductible, for corporation tax purposes. HMRC states that anything you claim must be 'wholly and exclusively' for business purposes sounds straightforward, but the reality is more complex and, with different rules for the self employed and small business owners, many fail to claim back all of their allowable expenses.
The list below highlights some less well-known tax-deductible purchases that apply whether you're a limited company, partnership or sole trader.
Tax-deductible expenses are job-related expenses on which you can claim tax relief.
If you're self-employed or have to fill in a self-assessment tax return, or are claiming for relief of more than £2,500, you must use your self-assessment to claim tax relief on expenses.
We all know the more common tax-deductible items, such as business travel, office costs, pensions and the like, but there are expenses that many of us regularly incur that you may not know are also tax-deductible. This includes:
Making the decision to start a business can be stressful, and there are several unavoidable costs associated with it. But did you know that you can claim for relevant start-up costs up to seven years before the business begins operations? Expenses such as computers and software, professional fees to ensure your company is registered correctly, internet and web domain fees, and even advertising are all tax-deductible. In addition, any expenses that are paid for using personal funds can be claimed for when the company or legal entity starts trading, so be sure to keep receipts and maintain accurate records as you're going through the start-up process.
If you work from home, you can claim part of your household bills. To do this, you need to determine what proportion of your home is used for work. So if, for example, your office accounts for 20% of your household space, you can claim 20% of the costs against tax. This includes the interest portion of your mortgage repayments and your broadband/phone costs, as well as utility bills and council tax. For line rental and broadband connection, a proportion of the cost can be claimed based on business use.
HMRC also offers simplified expenses for working from home. This is currently set at £10 a month if you work between 25 and 50 hours a month; £18 a month if you work between 51 and 100 hours; and £26 a month if you work 101 or more hours a month.
If you work from a specific business premise rather than from home, not only can you claim tax relief on the rent, but you can also do so on any repairs and maintenance to both the premises and your equipment.
You can't claim expenses or allowances for buying business property or premises, though, as this would be classed as an asset of your business.
Whether a limited company director or self-employed, you can also claim the cost of any training, CPD or seminar attendance. Again, the training has to be solely for business purposes, so updating or maintaining professional qualifications would be allowable. However, the rules do differ for self-employed people and company directors when it comes to adding new skills to a company's offering. Training related to setting up a new trade within a business qualifies as work-related training for a limited company – this includes soft skills training such as time management and leadership – and corporation tax relief is likely to be available. For the self-employed, training in a new skill is likely to be classified as capital expenditure and so cannot be deducted for tax purposes. You may, however be able to claim Capital Allowances - this means that training is seen as an asset of the company and the cost of the training is taken off before your annual profit is calculated.
While we all know we can claim expenses for a car, did you know you can also claim expenses for riding your bike? Repairs, maintenance and insurance are all deductible for business use on a mileage basis.
If you do travel by car, you can claim allowable business expenses for vehicle insurance and breakdown cover as well as mileage. Again, you can only claim back a proportion based on how much you use the vehicle for purely business purposes, not including your regular commute, so keep track of your mileage and reasons for travel.
Legal and financial costs, such as hiring an accountant or lawyer, are tax-deductible. But did you know that you can also claim tax relief on bank fees, overdrafts and credit card charges, not to mention the interest on bank and business loans, hire purchase interest and leasing payments? However, if you're using cash accounting, you can only claim up to £500 in interest and bank charges.
Sadly, you can't go on a shopping spree and then claim back what you spent, but you can include the cost of a uniform, protective clothing and even work costumes on your tax return. This also includes clothing branded with your company logo.
Professional subscriptions related to your business are also deductible. This could include subscriptions to trade magazines and professional journals, professional membership fees if needed to do your job, as well as annual subscriptions to approved professional bodies or learned societies, again if being a member is relevant to your job.
Donations to a registered charity by a limited company are an allowable expense, and the value of the donations can be deducted from business profits before paying tax, reducing your corporation tax bill.
While donations by sole traders don't count as allowable expenses, higher rate tax payers may be able to claim some tax relief if you include Gift Aid. When you Gift Aid a donation, the charity can claim back the basic rate of tax on that donation. As a higher-rate taxpayer, you can claim tax relief on the difference between the basic rate tax relief the charity has claimed and your higher rate; this is reported in your self assessment.
To claim tax relief, you must keep a record of donations showing the date, amount and which charities you've donated to. For donations of land, property or shares, you need to keep legal documents showing the sale or transfer to the charity and any documents from a charity asking you to sell land or shares on its behalf.
If you're self-employed or the director of a limited company, you'll be able to claim some forms of life insurance as a business expense. Policies must be taken out through the business rather than as personal cover to be eligible. If you have employees, you may also opt for death in service cover, so if an employee passes away while working for your company, a multiple of their salary will be paid out to their next of kin.
There are some differences in rules depending on whether you're self-employed or a limited company director so if you're unsure, seek professional advice.