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Cardwell Management Services UK Limited
Regency House, 45-51 Chorley New Road, Bolton, BL1 4QR
Cardwell Management Services UK Limited
Regency House, 45-51 Chorley New Road, Bolton, BL1 4QR
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How do I deal with my expenses?
There are certain tax implications for dealing with Business Expenses that you need to be aware of. An important part of your tax return is the part for business expenses.
As soon as you set up your business you should establish business accounts and use them for all business expenses. It is best to use your business bank account or business credit cards to pay for business expenses and use your personal bank account or personal credit card pay for personal expenses. All those transaction slips you accumulated when you were purchasing items for your business must be accounted for. Expenses are normally allowable within the company's accounting period in which it was incurred. Revenue expenditure incurred up to seven years before commencing trade may be treated as incurred on the first day of trading.
Business expenses are classified as allowable or non-allowable. Allowable expenses are costs that you incur wholly and exclusively for the purpose of earning business profits. These costs may be deducted from your turnover for the purposes of reducing the tax liability of the business. Examples of these are: wages, rent, professional fees, operating costs of vehicles or machinery used in the business. Non allowable expenses are costs that you incur for a non-business purpose. These are your own personal expenses, capital costs, and costs that are recoverable under insurance.
These are factors that determine if the business expense is allowable or non-allowable:
Wholly and exclusively
The basic rule for allowable business expenses is that they must be incurred wholly and exclusively for the purpose of trade. Expenses paid by the employees are allowable only if they are incurred wholly, exclusively and necessarily in the performance of the duties of the office or employment. For a sole trader or partnership, any private use by the owners restricts the amount of the expense that is allowable for tax purposes.
Benefits in kind
The costs that a company has incurred to provide for the private use of directors or employees result in a benefit in kind charge. This becomes an additional tax payable by the employee and National Insurance contributions for the employer.
Duality of purpose
Any expenditure that has a dual purpose element are not considered as allowable for taxation. As mentioned above, the item must be incurred wholly and exclusively for the benefit of the business. For instance, a suit purchased to wear at work has a dual purpose in that you need to wear clothing so this is not an allowable business expense.
Capital items and depreciation
Capital items are assets that will have enduring benefit to the company. For example, computers, motor vehicles, and office furniture. It may be possible to claim capital allowances over a period of time where percentages are specified by HMRC but you may not claim their cost as an allowable expense.
Legal and professional fees
Professional fees that are related to your trade are deductible such as fees for preparing your company accounts. However, legal fees that you incurred on taking on a new lease are not deductible as they relate to capital. For instance, the costs of recovering debts or preparing service agreements are allowable business expenses; expenses for acquiring land, or leases are not allowable.
Subscriptions
HMRC has a list of appoved subscriptions to professional and trade associations which are considered allowable business expenses.
Debts, taxes, penalties and fines
If the company is not entitled to recover VAT, the VAT inclusive expense is allowable. Bad debts that are included in the general reserve for bad or doubtful debts are not allowable but specific bad debts written off are allowable. Penalties and fines for breaking the law are not allowable.
Interest
Interest charges incurred to finance the business are allowable provided that you can prove that the money that was borrowed was used for the business.
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As soon as you set up your business you should establish business accounts and use them for all business expenses. It is best to use your business bank account or business credit cards to pay for business expenses and use your personal bank account or personal credit card pay for personal expenses. All those transaction slips you accumulated when you were purchasing items for your business must be accounted for. Expenses are normally allowable within the company's accounting period in which it was incurred. Revenue expenditure incurred up to seven years before commencing trade may be treated as incurred on the first day of trading.
Business expenses are classified as allowable or non-allowable. Allowable expenses are costs that you incur wholly and exclusively for the purpose of earning business profits. These costs may be deducted from your turnover for the purposes of reducing the tax liability of the business. Examples of these are: wages, rent, professional fees, operating costs of vehicles or machinery used in the business. Non allowable expenses are costs that you incur for a non-business purpose. These are your own personal expenses, capital costs, and costs that are recoverable under insurance.
These are factors that determine if the business expense is allowable or non-allowable:
Wholly and exclusively
The basic rule for allowable business expenses is that they must be incurred wholly and exclusively for the purpose of trade. Expenses paid by the employees are allowable only if they are incurred wholly, exclusively and necessarily in the performance of the duties of the office or employment. For a sole trader or partnership, any private use by the owners restricts the amount of the expense that is allowable for tax purposes.
Benefits in kind
The costs that a company has incurred to provide for the private use of directors or employees result in a benefit in kind charge. This becomes an additional tax payable by the employee and National Insurance contributions for the employer.
Duality of purpose
Any expenditure that has a dual purpose element are not considered as allowable for taxation. As mentioned above, the item must be incurred wholly and exclusively for the benefit of the business. For instance, a suit purchased to wear at work has a dual purpose in that you need to wear clothing so this is not an allowable business expense.
Capital items and depreciation
Capital items are assets that will have enduring benefit to the company. For example, computers, motor vehicles, and office furniture. It may be possible to claim capital allowances over a period of time where percentages are specified by HMRC but you may not claim their cost as an allowable expense.
Legal and professional fees
Professional fees that are related to your trade are deductible such as fees for preparing your company accounts. However, legal fees that you incurred on taking on a new lease are not deductible as they relate to capital. For instance, the costs of recovering debts or preparing service agreements are allowable business expenses; expenses for acquiring land, or leases are not allowable.
Subscriptions
HMRC has a list of appoved subscriptions to professional and trade associations which are considered allowable business expenses.
Debts, taxes, penalties and fines
If the company is not entitled to recover VAT, the VAT inclusive expense is allowable. Bad debts that are included in the general reserve for bad or doubtful debts are not allowable but specific bad debts written off are allowable. Penalties and fines for breaking the law are not allowable.
Interest
Interest charges incurred to finance the business are allowable provided that you can prove that the money that was borrowed was used for the business.
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