This is the first of a series to help small business owners (sole traders and partnerships) better understand what can and cannot be included as business expenses.
It is worth noting at the start that HMRC has a vast amount of guidance on this topic and it is only possible to provide summary information in this blog. If you have a specific question in relation to expenses, do please call or email (details at the top of this page).
What are Profits exactly?
In a nutshell, your ‘Profits’ are income less expenses. You are taxed on your Profits, so the higher your expenses, the lower your tax bill. Not all expenses, however, can be deducted from income; Capital items such as a van, a computer, business premises and furniture need to be shown separately on your Self Assessment tax return – but they will reduce your taxable profits too.
Wholly and Exclusively?
The key rule is that a self-employed person can only deduct expenses where they are ‘wholly and exclusively’ incurred for the purposes of the trade or profession. Any expenses must be directly related to the running of your business. Private expenditure is not allowable.
If you are ever asked by HMRC to provide evidence of your business expenditure, you will need to prove:
- That an expense was actually incurred (eg receipt, bank statement)
- That the expense was ‘wholly and exclusively’ for your business
Keeping accurate records is hence important and I shall be covering this in more depth soon.
Duality of Purpose?
In most cases, if you have incurred an expense for your business – and have kept a receipt for proof of purchase – it will be allowable. For example, business insurance or newspaper advertising. However, as many small businesses run their operations from home rather than separate premises, this can cause problems because of the ‘duality of purpose’ inherent in many costs – motoring, telephone and broadband, heat and light are just a few examples where this commonly occurs. It is therefore important to be able to identify the portion of the expense which is business-related and which is not.
In future blogs I shall be exploring these principles in more depth and looking in particular at Motoring Expenses, Office Costs and Using your Home as a Workplace.