There is an old concept of tax accounting “Wholly & Solely or Wholly & Exclusively for the purpose of your business”? There is no trickery at play here, if an expense is essential for the running of your business, then it may be deductible.
To give an extreme example, if you run a dive school you can claim the cost of scuba gear. However, if you run a software company and you try to expense a snorkel, eyebrows will be raised!
Irrespective of any government’s tax collection agency, they are not in the business of stopping entrepreneurship. They rarely bite if you ring them but be aware not to abuse the rules in place.
This note is to provide guidance but does not replace the need to speak with a qualified tax accountant. I would also point out that you may have legitimate business expenses, but that does not make them tax-deductible, hence I underlined 'may be' above.
Where to start?
A basic allowance many forget when starting out is equipment purchased before commencing business. In the UK, you can claim the cost of computers, tablets etc up to 6 years before trading. So always keep those receipts!
If in doubt ring your local tax office to see what your entitlements are for your business category.
NOTE: I have ignored R&D tax credits and relieves. If you are developing IP or manufacturing discuss with a professional tax adviser or talk to your local tax office.
The obvious items are things like stationery, website costs, software, marketing, advertising, insurance, travel, telephones, professional subscriptions, rent and equipment.
What is often missed is the costs of working from home. More of us are doing it and if you have registered your home address as your company address, consider the follow as a guide, but do check with your local tax office:
- If you have a room or area in your home, ask yourself how much space and time do you use?
If a 5 room house (including kitchen/living room) and one room is your office, then take a 5th of your monthly rent/mortgage as a business expense.
- Same for utilities- if you can justify that a 5th of your bills are driven by your business, then this is deductible
- Council taxes – same concept as above.
One other area is that of subsistence. For those that travel to clients, there are allowances for ‘subsistence’ which is lunch/food. This can vary by country, but check your local rules for allowable daily expenses, if they apply.
Training and development
The cost of continuous professional development is usually deductible, if for the purposes of your business, e.g. solicitors, accountants etc.
If you need to do a course or attend a conference, this is deductible, if relevant for your business. If you organise a team building day, this can be a deductible. However, only the portion related to training. The £5k behind the bar afterwards, is not a deductible!
Now while a valid business expense, THIS IS NOT TAX DEDUCTIBLE. You or your accountant will have to add this back when calculating your tax bill. So be careful before splashing out on £100 bottles of wine. This is coming off your bottom line!
This is a grey area, some legal costs are not deductible. Things like cost of issuing share capital or legal costs related to assets ARE NOT DEDUCTIBLE in the UK. Fees for loans, trademarks are. If in doubt ring your local tax office.
Branded gifts to clients
NOT DEDUCTIBLE. Again check your local rules, but in the UK unbranded gifts up to £50 per year are deductible, such as cards, flowers etc but be careful with branded merchandise, is the expense necessary to run your business? Business cards a big yes, Golfing umbrellas, really?
Uniforms and safety work-wear is deductible if you would not wear them in your usual life (Halloween, I’m sure is an exception). However, suits, dry cleaning etc are not deductible. I agree this is unfair, but these are the rules.
This is a risk for everyone. Your invoice serves as a record of income. As far as tax authorities are concerned, you have earned this money.
It is your duty to chase payments. So, if you feel after several calls, emails etc you have a bad debt on your hands, record this as a bad debt unrecoverable and deduct as a valid tax-deductible expense.
If you have a client that is justified in asking for a refund, issue a credit note. Make sure you regularly review debts and evidence attempts to recover especially as you may be audited.
Understanding tax returns
At the end of the year you will need to add back items that were not deductible, e.g. team dinners, client entertainment, some legal costs, fines or penalties etc.
So, think before you spend - ask yourself:
- Is the expense 100% to be used for running my business? (By the way, no one is going to penalise you for watching a bit of online TV when on your laptop away from home). Just be mindful of the type of equipment you buy.
- Are you happy to incur a non-deductible, i.e. is the return on investment worth it? Is the return on a meal a lucrative contract? Or just a waste of your time and money?
- Have you been paid in advance? If you will be delivery in the following accounting year, treat as deferred income, so as not to pay tax until ready.
NOTE: Make sure you keep your receipts for 6 years. Set up a folder and try to sort by expense type.
Never rush to register for VAT, unless you are in a business that requires it, e.g. retailing in goods that are vat-able or importing goods from countries that require VAT registration.
There are clear limits set by your local tax authority about when you have to register. I.E. when you hit a turnover threshold.
So, there is a false economy in thinking you get ‘money back on spending’ if you register for VAT. Think about it, you will have to charge clients VAT for services. Are you potentially pricing customers out, when at your most important phase- establishing your brand? Can your clients recover this VAT??
Also, you are taking on more admin and paperwork and you will usually end up in a position of paying a VAT bill on a regular basis.
Finally, not all VAT is recoverable, depending on your industry. Please stop thinking VAT registration is free money!
So please think before you register. If in doubt discuss with a qualified tax professional or your local tax authority to be on the safe side.