As with being employed, you can deduct costs of your employment (guidelines apply) from income before calculating tax. Self employment is treated differently once as you can deduct actual running costs of your business from turnover, before calculating taxes.
So, you can claim the full cost of most short life items and capital allowances on items where there is a resale value remaining after a period of around two years.
Generally, expenditure is categorised in three categories:
If you purchase something, spend money on improving or maintaining it, that is classed as capital expenditure. There are special rules when dealing with capital allowances.
As long as an item of expenditure is allowable for tax relief, the cost can be subtracted from income before calculating taxes. If a cost arises primarily for business purposes, but there is an element of private usage, only the business proportion can be claimed. If the cost arose the other way around, or the business/private proportions are not clear – the cost cannot be claimed.
The bulk of expenses claimed against income would be under this category and include:
Accountancy, Legal and Professional Fees
Any fees paid to Accountants, Solicitors and Architects are allowable expenses. Legal Fees also cover payments made for Professional Indemnity (PI) premiums.
Legal costs incurred as a result of purchasing property or large items of equipment are not allowable.
Fines and legal fees/costs incurred as a result of breaking the law or tax disputes are not allowable.
Advertising, Marketing and Business Entertainment Costs
Claim expenses spent advertising across any media, marketing scheme costs. Entertainment costs such as staff parties or corporate logo bearing gifts.
Expenditure on entertaining clients, suppliers or customers is NOT allowed as an expense - this includes hospitality at events.
Staff parties are allowable (up to a limit of £150 per person per annum).
Bank, Credit Card and Other Financial Charges
You can claim expenses on Bank, Overdraft and Credit Card fees. This category also includes payments and interest paid on leasing agreements or alternative financial arrangements.
- Transaction fees
- Leasing payments
- Repayment or Capital portion of loan, overdraft or other finance payments.
Car, Van and Travel Expenses
Costs of running, insuring and maintaining a vehicle are allowable. Travel costs as well as accommodation costs are allowable expenses.
- Vehicle Repairs, Insurance, Servicing, Fuel
- Hire costs
- Licencing costs
- Breakdown memberships
- Train, bus, taxi and air fares
- Hotel costs and meals (travel requiring overnight stay.)
- Private usage/proportion of any expense
- Purchase costs of vehicles (this goes under capital allowances)
- Travel between your home and office
- Non-Business travel meals
Communications, Stationery, Phone, Internet
Costs of running a connected office are allowed as expenses. This includes phone, internet, postages, stationery and more.
- Phone, Mobile, Internet
- Email and fax running charges.
- Stationery and Postage.
- Printing costs.
- Small office equipment costs (i.e. cheaper equipment with no real resale or asset value. Computers would go under capital allowances.)
- Computer software.
- Private usage proportion of expenses.
- Purchase of new equipment which should be under capital allowances.
Construction Industry - Payments to Subcontractors
If your business is in construction, pre-tax payments made to subcontractors is an allowable expense.
Pre tax payments for any work done are allowable - For example: if a subcontractor is paid £1,000 before any voucher tax deduction, the entire £1,000 should be entered as an expense.
Cost of Goods - Stock
Stock costs, including raw materials for manufacturing are an allowable expense.
- Goods purchased in order to resell
- Cost of raw materials used in manufacturing
- Direct costs of producing goods.
- Private usage of any goods.
- Depreciation of any equipment.
Insurance policies taken out to cover items within the business are allowable expenditure.
Any insurance premium is allowable, however recoverable costs are not.
Interest on Loans
Interest paid on Bank and other business loans are allowable expenditure.
Repayment portions of loans are NOT allowable.
Debt Write Offs
Any amounts which have been included in business turnover, but have not been paid as they are not recoverable debts can be written off as an allowable expense.
Any amount already included in the turnover figure, but which cannot be recovered can be included in this category as a debt write-off.
Payments made to professional agencies or clubs for subscriptions to journals are allowable expenditure.
Payments to clubs, charities or political parties are excluded.
Rent, Rates, Power, Water
Costs associated with running and maintaining your business premises are allowable expenditure. This includes Rent, Rates, Utilities etc.
- Rent for business premises
- Business and water rates
- Light, heat, power
- Insurance and Security
- Home as Office costs (proportioned)
- Non-business usage of premises (proportioned)
Costs of purchasing business premises
Uniform and Safety Wear
Costs associated with purchasing and maintaining uniforms bearing business identification can be allowed as an expense. Also includes clothing worn for health and safety requirements.
Costs of any ordinary clothing or non-safety related clothing are excluded.
Costs associated with hiring and remunerating employees - including benefits. This category excludes any wages or drawings made to yourself.
Any costs associated with hiring and remunerating staff are included, such as:
- Salaries, wages, bonuses (pre-tax)
- Staff pensions or benefits
- Employment agency fees
- Subcontracted labour cost
- Employers National Insurance Contributions
Payments made to yourself are excluded as your personal pension and national insurance payments. Non business work payments cannot be included.
This is fairly straightforward and basically disallows any amounts paid to yourself or private spending, which does not have any business element of use.
If you have a mixed usage of an item or service paid from the business, you must be able to clearly identify the split in spending between private and business use and then claim the business portion only.