“Tax doesn’t have to be taxing.” That may be true but sometimes it can certainly feel a little taxing when the lines of what you can and can’t do start to become blurred. Before we dive into the detail we should first discuss a tax concept that HMRC uses to determine whether something can or cannot be claimed for tax purposes.
The W & E Test:
“Wholly and exclusively” means that you can claim for any expenses that are precisely that, wholly and exclusively for the purpose of trade. Unfortunately HMRC isn’t always consistent with their decisions on what constitutes wholly and exclusively but we’ll do our best below to outline what you need to know.
As always, at Moulds and Co Accountants we would advise speaking to a tax advisor if you are ever unsure about the status of your own expenses. Our staff in Wetherby will be happy to confirm whether an expense can be allowed if you still feel unsure on it’s tax status.
- Professional Fees: Usually professional fees, such as your accountants etc are allowable. Exceptions to this rule are:
- Purchases of property or another business assets,
- Tax dispute settlements,
- Fines for breaking the law.
- Entertaining: Almost always deemed a non-allowable expense. Despite entertaining being seen as a way to generate new business or drum up connections, it’s unlikely this will be allowable.
- Motoring: Running a company vehicle? That’s allowable. Using it for private journeys? That’s not. Commuting from home to work is also seen as a private journey so be sure not to claim for this.
- Travel: Again, home to work travel costs are not allowable however any business related travel costs are tax allowable.
- Bank Charges: If you took out a loan or have an overdraft which you suffer charges on, these costs are tax allowable so long as the loan/overdraft was taken out for business purposes.
- Cost of Goods: Goods taken for private use are definitely not tax allowable. Goods bought for resale or to be consumed by your business should be deductible.
- Cost of assets: Business equipment and vehicles etc are held on your balance sheets as assets and will be slowly written off against your profits by making a depreciation charge. Eventually this will write off the asset costs over the useful life of the asset.
- Bad Debt: Whereas debts relating to assets or provisions are not allowable, irrecoverable debts incurred due to a customer failing to pay an invoice are allowable and the sales value can be written off for tax purposes.
- Rent: Any property used for business purposes (not private use) are allowable. If both business and private use occur in the property then the case costs will need to be apportioned accordingly. Purchase or sale of a property is not however.
- Phone and Internet: As a general rule these are all allowable. Try not to overuse this for private use though.
- Business or Equipment Repairs: All allowed unless the costs are deemed as an improvement.
- Wages and NIC Costs: All allowable apart from the self-employed owners drawings.
That’s a lot to work through but all of those are fairly straight forward. This is a slightly simplfied list but you can see how the lines can quickly become blurred. Further to this, there are some exceptions to the rule.
Next is a short list which you might consider as tax allowable but which all fall short of the “wholly and exclusively” requirements.
- Clothing: If you’re required to wear a uniform or protective clothing for work purposes then most likely this will be allowable. Ordinary clothing such as business suits etc would fail the W&E test however and thus not be allowable.
- Subsistence: Food and drink costs when traveling for business purposes are generally allowable, although keep this in moderation. Any general lunches around the office etc will definitely not pass the test
- Business Use of Your Home: Time apportioned use of a room in the home (including costs for the mortgage interest or rent etc) could be allowable. Excessive or over-inflated claims however may subject the eventual sale of the property to capital gains tax charges, so be careful with that.
Overall there is a lot to take in and consider when deciding what is and what is not tax allowable. As such we would always advise to err on the side of caution and speak to an accountant or tax advisor if you are unsure how to proceed.