If you run a limited company you will incur several types of expenses which may range from printing and postages to capital items, such as computer equipment. But sometimes clients are surprised when they are told they can’t claim tax against certain expenses. As Claiming Business Expenses correctly is vital for the wellbeing of your company we thought we would explain some of rules created by the Government gnomes
Why isn’t it tax deductible?
It’s not my job to tell you how to run your business, or what expenses you can put through your accounts. However, it is my job to interpret the existing tax regulations, to help you to avoid investigations, fines, and penalties as much as possible. If you want to treat your friends to a meal and put it through your books, that’s your right. However, it is classed as ‘entertaining’ and therefore not allowed for tax, so I will exclude it from your expenses when I calculate the tax for your tax return.
Be sensible. It may be amusing to try and get something past that old guy that does your accounts, but I’m not the one you should worry about. Should HMRC decide to pay you a “visit” (and you would be surprised how many they do) your accountant will be there to help, but you would be the one who would have to justify everything as genuine business expenses.
The golden rule is ‘Wholly and Exclusively’
HMRC’s golden rule is that expenditure must be incurred wholly and exclusively for the purpose of the trade, profession or vocation. However, If you are a director of your own company, and claiming expenses as an employee, the definition is slightly different: ‘the expenditure must be incurred wholly, exclusively and necessarily in the performance of your duties.’
There are some things that can be for both business and personal use, such as your car, but if you put the costs of running your car through your sole-trader business, the proportion of personal use has to be calculated, and removed from the tax calculation.
The same rules will apply for VAT, insofar as, if you can claim for Income or Corporation Tax, then it is highly likely that you can also claim for VAT. There are some variations between sole traders and limited companies, we will explain those in a later article.