HM Revenue and Customs tells us that as far as taxation is concerned, expenses that are incurred wholly and exclusively in the generation of profits can be claimed against tax. A distinction does need to be drawn, however, between expenses and capital expenditure. Where expense is incurred in acquiring assets that are to be used by the business for more than 2 years, these should not be expensed in the same way, as for example, rent or cost of goods bought for resale. Capital expenditure would have to be reclaimed under the capital allowance regime.
Types of business expenses
If you look at the self assessment full tax return SA103F, you will see that boxes 16 to 29 give a breakdown of the different categories of expenses that
your business may incur. To complete your self assessment, you would need to apportion your expenses into however many of the HMRC categories as are applicable, which means that when you record your transactions they should be divided into separate HMRC categories. It is perfectly acceptable to have more categories than this as long as each of your categories is a subdivision of an HMRC category. This way it is an easy matter to add your categories together to arrive at an HMRC category. So what are the categories that HMRC want us to record on the tax return?
Briefly they are described as follows:
Cost of good bought for resale, or goods used
Construction industry - payment to subcontractors
Wages, salaries and other staff costs
Car, van and travel expenses
Rent, rates, power and insurance costs
Repairs and renewals of property and equipment
Phone, fax, stationery and other office costs
Advertising and business entertainment costs
Interest on bank and other loans
Bank, credit card and other financial charges
Irrecoverable debts written off
Accountancy, legal and other professional fees
Depreciation and loss/profit on sale of assets
Other business expenses
Fortunately, there is a handy little HMRC guide called expenses and allowances for the self-employed.
Business expenses explained
Using the information from the HMRC guide above, we can now look at these business expenses in a little more detail.
Box 16 - This includes not only the cost of goods bought for resale, but raw materials and direct labour that may be used in enhancing these goods or manufacturing them. It does not include cost of goods taken for private use or depreciation.
Box 17 - Does not include payments for non business work.
Box 18 - This is exactly what it says on the tin, and includes bonus as well as employers NI. One point of misunderstanding though, is the proprietors own wages. These are technically referred to as drawings, and are not an allowable business expenses, and neither are income tax and
NI payments made on the proprietors profits.
Box 19 - As well as fuel, repairs and MOT, includes road tax and insurance and parking and tolls as well as motoring organisation subscriptions.
Also public transport and taxis, hotel rooms and meals. What is not allowed is non-business travel, the cost of purchasing vehicles (capital allowance regime), and fines. It is normal to apply a percentage that is business related to vehicle use. So for example, if 80% business use then 20% would be personal use, and this figure would be entered into box 34.
Box 20 - Could also include cost of using home as office, but excludes cost of non-business part of office.
Box 21 - Any cost of repairs to business premises or equipment is included here. It also includes replacing small items of equipment (eg small tools, light bulbs etc). It does not include the cost of improving premises or equipment - this comes under the capital allowance regime.
Box 22 - This includes also mobile phones, internet costs, computer software and postage. It does not include purchase of new items of office equipment, unless they are fairly inexpensive - eg staplers, ring binders etc.
Box 23 - Usual advertising media as well as website hosting costs. Entertaining clients is a problem area however, and is not allowed.
However, gifts to clients may be allowed, but only if not items of food, tobacco or alcohol, costs less than £50 per head and contains a business advertisment.
Box 24 - This should not be confused with bank charges - only interest on loans or overdrafts should go here. It does not include repayments of principal.
Box 25 - These are the charges that appear on bank or credit card statements.
Box 26 - When a credit sale has been recorded but the debtor never pays, tax has been paid on an element of sales that did not, in fact, materialise. This is reclaimed here. However, it does not include non-trading bad debt, such as a loan made to a former employee that was never recovered.
Box 27 - You should include your professional indemnity insurance here. Not allowed are legal or professional fees associated with buying fixed assets - these costs would be included in the purchase price of the assets themselves and capitalised.
Box 28 - Loss on sale of assets may need some explanation. When an asset is sold, the proceeds may be more or less than the asset's written down book value. When the proceeds are less than the book value, we say that a loss on disposal has arisen, and this figure would normally appear in the profit and loss account as an expense of the business - in fact it must appear here in order for the accounts to balance, because the net assets of the business have just been reduced by that amount.
The rule is simple: loss on sale of assets and depreciation cannot be claimed, and the whole of box 28 must be entered in box 43, in effect nullifying the total in box 28 (however, it is possible to claim a capital allowance if the proceeds of disposal are less than the tax written down value - see box 55 of tax return).