Allowable business expenses and tax reliefs on business investments
Understanding what expenses are, and aren't, allowable deductions from your business profits is a key part of reducing the tax you pay. Likewise understanding the tax reliefs and allowances available to you when investing in your business helps you make better informed decisions about the net cost of the investment. In some cases (such as investments you make in innovative new technology or business processes) the tax relief is greater than the actual cost to your business.
The general rule is that the expense has to be "wholly and exclusively for the purpose of your business". This means that:
- The costs are incurred while actually performing your business or trying to attract more business. Investments you make in your business, for example buying new equipment, don't qualify as business expenses (but will qualify for other tax allowances as explained below).
- There's no element of private or personal use. Sometimes this means the expense has to be apportioned between business and personal use; other times it means the expense can't be allowed at all if the use was shared between business and personal use.
In practice applying this general guidance involves judgement and understanding case law. We've summarised the treatment of key types of expenses a business incurs, differentiating where needed between incorporated and unincorporated businesses.
Advertising and Marketing
You can claim tax relief on advertising and marketing costs for your business. However you need to be aware that some costs you may consider "marketing" are considered "entertaining" for tax purposes - for example taking a client out to lunch. In general expenses on "entertaining" are not allowable.
Bank interest and overdraft charges
Incorporated businesses which have loans and overdrafts in the company name can claim tax relief on interest payments and any other bank charges. Unincorporated businesses can usually do the same, provided there is a business bank account that's entirely separate from your personal accounts.
If a Company makes a Gift Aid donation then tax relief can be claimed. The rules are more complex for other types of donation. Alternatively the same donation could be made personally and claimed in your self-assessment tax return. Likewise unincorporated businesses can claim the cost of Gift Aid donations in the self assessment tax return of the owner making the donation.
Costs of entertaining clients are never allowable business expenses. HMRC won't allow these costs even when a necessary part of winning new business or retaining existing clients.
Costs of entertaining employees may be allowable expenses, but may also be a benefit on which your employees have to pay tax. The expense must be an annual event, open to all staff and cost less than £150 per employee present - otherwise the full cost becomes a taxable benefit for your employees.
Food and drink
Claiming the cost of food and drink at your office (whether a home office or not) depends on whether you have employees working there. If you don't then you can't claim any costs. If there are employees working there then you can claim the costs of refreshments (tea, coffee, biscuits etc) along with any free meals you provide at a canteen, provided they are made available to all your staff.
Claiming the cost of food and drink while travelling depends is normally allowable. For Companies the costs need to be incurred while you are away from your normal place of work on a business trip. For unincorporated businesses the journey needs to be outside your "normal working pattern" - e.g. if you regularly visit a client and work from their premises this may be considered part of your normal working pattern so costs wouldn't be allowed.
If an incorporated business gives a gift to an employee it may be considered a taxable benefit for them. Any gifts by an unincorporated business are treated as personal gifts, so there is no taxable benefit but no business expense either.
Gifts to anyone else are allowable business expenses provided that; it's not a gift of food, drink, tobacco or vouchers; it costs less than £50 per recipient per year; it's prominently marked with your business's name.
Parking fines and speeding tickets
Are never allowable business expenses, even if incurred while travelling on business.
Phone and Broadband costs
For incorporated businesses - provided the contracts are in the company's name, and any personal use is "reasonable" means that these are allowable company expenses. Keep in mind that if the company is paying for personal use this may need to be treated as a taxable benefit in your personal tax return. The key here is if there are additional costs related to your personal use - e.g. broadband costs are usually fixed, so there are no additional costs for reasonable personal use, and reasonable personal use of your mobile may be within "bundled" minutes that you would have paid for anyway. On the other hand, if contracts are in your personal name (as would always apply to unincorporated businesses) then costs can only be claimed as business expense when they are additional to your personal use. For example, since home broadband costs are usually fixed regardless of use you can only claim them if there is no personal use at all. Likewise for line rental, monthly mobile charges and "bundled" minutes. Whereas the cost of broadband in your office can almost always be reclaimed even though it's in your personal name.
You can claim the full cost of professional fees incurred for the business (e.g. solicitors, accountants, designers). However some costs, e.g. if the company is paying the cost of a Director's personal tax return, would need to be reported as a taxable benefit. Alternatively fees that are "personal" can be put directly against the Director's loan account (in which case they are a direct cost to the Director, not business expenses or benefits).
Companies can claim the cost of professional subscriptions for approved processional bodies without any extra tax or NI to pay. Other subscriptions would count as a taxable benefit for the Director or employee and the company would pay additional National Insurance Contributions. If the costs are paid by the employee or Director and reclaimed, this will always be a taxable benefit.
Unincorporated businesses can claim any professional membership that gives you the right to use a qualification that you use in your business. You can also claim the cost of subscriptions to trade associations such as your local Chamber of Commerce.
Rent of an office, provided it isn't part of your home, is an allowable business expense. See "working from home" below for the treatment of home office costs.
A company can claim costs for travel expenses provided these are a business journey (travel to your normal place of work doesn't count). For unincorporated businesses the rules are similar, but the travel must not be "regular and predictable" or between your home and a "base of operations".
Mileage for business use of vehicles that are owned personally by an employee or business owner can be reclaimed at HMRC rates. The cost of your business buying a vehicle isn't a business expense (but may be an investment that you can get tax relief on) but maintenance and running costs are normally allowable expenses. The tax system for company cars and other business vehicles is too complex for this guide and we'd always recommend getting professional advice.
Working from home
For incorporated businesses, the company can reimburse extra costs you've incurred personally by working from home. HMRC allows a flat £4/week fixed expense without needing receipts or other evidence. This is usually less than the overall costs you're incurring, e.g. on power and electricity, but to claim more than this you need to be able to separate out business and personal use. For example you can usually include costs for refurbishing or furnishing a room used exclusively as a home office. You can't claim back any costs that you'd have incurred anyway due to living in your home (such as mortgage interest and council tax). It is possible to charge the company rent, e.g. for a home office, but there would need to be a formal contract in place and you'd have to disclose the rental income, and be taxed for it, on your personal tax return.
For unincorporated businesses - there are different rules about business use of the home. You can use a simplified flat rate allowance which covers heat, light and power and can apportion all other costs based on how much of the home is used for your business and for how long during a day. This is more generous than the treatment for Companies, since it allows apportionment of costs such as council tax, rent and mortgage interest.
Capital Allowances are the tax relief that is available to you for some types of investments you make in your business. Not all investments qualify for tax relief or the same type of relief. Qualifying investments include cars and vans, computers and electronic equipment, tools and specialist materials. Investments such as buildings and property aren't allowed (although integral fixtures and fitting may be allowed).
Tax reliefs available
The full cost of investment in plant and equipment, excluding most cars, is allowable in the year you make the investment - up to a limit of £200,000 in total over a full 12 month accounting period. Once this Annual Investment Allowance has been used up there is a further allowance which allows you to claim 18% of the remaining (unclaimed) costs each year. This additional allowance also applies to most cars bought by the business.
There is a lower rate of 8% for investments with a useful life of 25 years or more. This rate also applies to integral features in a building (e.g. lighting, power supplies, heating systems) and cars with an emissions rating of more than 130g/km CO2.
There is a separate allowance for investments in energy efficiency, water saving and new cars with low emissions (up to 50g/km Co2). The full cost of these investments can be claimed in the year of investment without this contributing to the £200,000 limit above.
Hire Purchase and Leases
Capital allowances aren't generally affected by the way you fund investment. In particular if an asset is acquired on Hire Purchase, allowances are generally given as if you'd purchased in cash. This means the full tax relief may be available in the first year (using your Annual Investment Allowance) even though you've only made a small part payment.
If you are leasing the asset you aren't entitled to Capital Allowances. The lease is instead treated as a business expense, although accounting rules for leases mean that the expense in a given period won't necessarily equal the lease payments in that period.
It may be that some investments (e.g. in vehicles, computers and electronics) have private use by employees. For incorporated businesses, if the private use is more than "insignificant" this will be a taxable benefit (so the company pays additional National Insurance Contributions and the employee pays additional Income Tax and National Insurance).
For unincorporated businesses the cost of the investment needs to be apportioned between business and personal use, and tax relief is only available on the portion used in the business.
When you sell an asset that you've claimed capital allowances on, the sales proceeds (capped at the original cost) are deducted from any remaining unclaimed investment costs in that pool of assets. If the sales proceeds exceed the remaining value of the pool (e.g. because you'd claimed 100% of the cost when you bought it, using your Annual Investment Allowance) then you have to pay the balance as an additional tax charge. This effectively "reimburses" the excess tax relief, so that you have only got relief on the difference between the original purchase price and eventual selling price.
Research and Development
The goverment provides a special type of tax credit to encourage you to take a risk in projects where you're not sure the outcome is scientifically or technologically possible, or you don't know how to achieve it in practice. This includes cost of developing new products, processes or services or improving existing ones.
- For SME's making a profit you'll generally receive a credit for 25% of the costs you've incurred.
- For SME's not yet making a profit you'll generally receive 33% of your costs as a cash benefit.
If you've received a grant, or other form of state support, for the development you are still eligible to claim some tax credits - although this is less generous.