I have decided to post this small guide because of constant questions I was getting from small business owners in regards to business expenses HMRC allows to claim on self-assessment.
This guide is more of a rule of a thumb rather than a comprehensive tutorial. If you require in-depth advice or consultation, then please fill in the form and I will come back to you within 48 hours.
Before I get into details it is important that you know what HMRC considers as business expenses. In short, these are expenses exclusively for the business. Anything you use for your private purchases is not deductible from tax or profits of the business.
We have made it clear what tax-deductible business expenses are so let’s divide business expenses into three categories for simplicity:
- Purchases and Direct Expenses
Purchases and Direct Expenses
This category covers all expenses such as:
- Products which are later sold to customers
- Postage which you have paid for the products which are later sold to customers
- Purchase of components or ingredients which are later used to produce your product and sell to customers
- Salaries for productive labour (a staff which makes goods for sale to customers or directly delivers service to customers, or directly contributes to sales)
This category can be tricky. This includes all other costs which are not Assets or Direct Expenses, or Purchases. In this category of business expenses we will find among others:
- Repairs and Maintenance
- Business Rates
- Internet and Software
- Mobile phone
Some other business expenses HMRC allows to claim will be:
- National Insurance Contributions paid by Employer (this is not the amount deducted for National Insurance from Employee!!!)
- Gross amount for Salaries (admin staff not included in direct expenses)
- Employers Pension contributions (Employers part only!!!)
- Interest on loan (only Interest part!!!)
- Leasing cost
- Vehicle and Machinery rental
The above is not an exhaustive list, however, there is one type of expense which I want you to be very careful with. This is:
- Entertainment (BE VERY CAREFUL, ADDITIONAL RULES APPLY!!!!)
This particular expense is bound by additional rules. Depending on how you spent the money and who are the participants it may, or may not be tax deductible. For more information on this particular situation please fill in the form and we will be happy to advise accordingly to your situation.
I count expenditure in this category as capital expenditure. This does not affect your profits directly. I record the entire amount to something called Balance Sheet. I calculate the amortisation or depreciation at the end of the financial year which in turn will lower your profits.
We now know what the Assets expenditure is so to make it clear I am going to give a few examples:
- purchase of Equipment
- purchases of vehicles
- purchase of office furniture
- purchase of computer and IT equipment
- security equipment
- improvements to property
- purchase of buildings and land
It is worth noting that not all equipment will meet the criteria to be recorded as an asset. The main criteria for a business expense to be treated as an asset are that the expected lifetime of the item is more than 3 years. That means that if you are the builder and you buy a set of buckets or wheelbarrow frequently then these purchases will be considered as overheads rather than assets.
If you need more clarification on business expenses, do not hesitate, contact us now.