Tax-deductible expenses explained

Tax-deductible expenses explained

Tax-deductible expenses are part and parcel of running your own business – whether a sole trader or a PLC.

But the problem is often that many business owners think they can buy almost anything and write it off as a “wholly, exclusively and necessary” expense.

Self-employed people often trip up over what they can legitimately claim. And it can leave them facing issues.

HMRC regularly reveals its claims for tax-deductible expenses that are rejected. These were made in the hope of reducing a tax bill. Here are a couple of our favourites:

  • A carpenter’s claim of £900 for a 55-inch TV and soundbar to help him price his jobs was rejected
  • As was one business owner who tried claiming £4.50 for sausage and chips as meal expenses for 250 days

Like so many business owners, they thought that they could use their business bank account to fund their lifestyles.

The reality is that if you don’t use an accountant and file your own accounts or self-assessment return, you may end up with a penalty for unpaid tax if you’re not careful.

What are legitimate tax-deductible expenses?

Tax-deductible expenses are those that are, in the words of HMRC, “wholly, exclusively and necessary” for the running of a business.

These expenses are used by accountants or HMRC to assess how much tax you owe.

You don’t get the money spent back, but it reduces what you owe. And that’s where some business owners get a little unstuck.

Let’s take the claim made by the carpenter above. We don’t know anything about the person but he thought he could claim that £900 cost for the TV and soundbar.

If the expense been legitimate (let’s say the £900 was spent on tools for his business) then the amount would have reduced his tax bill by that amount!

The amount isn’t paid to the carpenter, it merely reduces his tax liability.

We list below some of the many allowable tax-deductible expenses but let’s consider another example.

If you attend a meeting with a client in another part of the UK, then you can to claim expenses for parking and a hotel stay.

You could also claim for stationery you needed for the meeting. But you can’t claim for a Saville Row suit saying it was bought for that occasion!

Expenses errors

The biggest problem is some business owners think any expense can be classed as legitimate.

One of the biggest claims is for lavish ‘business lunches’. The taxman can reject your claim as the meeting could have taken place over a coffee rather than the Michelin-star restaurant.

And the business owner above was wrong to think that his daily lunch of sausage and chips was a legitimate tax-deductible expense. Meal purchases for business owners are not allowable unless you are away overnight for a legitimate business reason!

Missing out

The fear of making a mistake can sometimes result in business owners and the self-employed missing out on some claims.

For example, you may pay for an item using a personal credit or debit card because you’ve forgotten your business card. But many people forget or don’t realise they can make the claim as it left their personal account.

Another example of something you may miss out on is that you can also claim for promotional gifts up to the value of £50 per customer too.

Tax-deductible expenses

Here is a list of some of legitimate tax-deductible expenses. This isn’t an exhaustive list but an indication:

  • Accounting fees
  • Advertising
  • Banking fees
  • Business Travel
  • Business association membership dues
  • Computers and tech supplies
  • Consulting fees
  • Costs of goods sold
  • Equipment
  • Franchise fees 
  • Furniture or fixtures
  • Equipment repairs
  • Interest
  • Mortgage interest on business property
  • Newspapers and magazines
  • Parking and tolls
  • Rent
  • Social media advertising
  • Subcontractors
  • Telephone
  • Utilities
  • Video equipment for a business channel, such as YouTube

If you’re not sure, it’s always best to speak to an accountant or to ask an accountant to act as your agent.

You may cover the cost of using an accountant may by reducing your tax liability. If you want to know more, contact us.