Business expenses claimed against profit while running a business is very important.
The reason is that any qualifying expense would gain some taxable relief, therefore, paying less tax.
What can be classified as a business expense?
The easiest way of explaining this is any amount you spend that relates to day to day running of your business.
When is an expense a deductible or not a deductible expense for tax purposes?
A business expense can be an allowable accounting expense but not a tax-deductible expense.
The impact of non-deductible expense on profit.
The expense that is not an allowable expense would be added back to the profit and therefore chargeable to tax.
Three main conditions for tax-deductible expenses.
1. This expense must be wholly and exclusively for purpose of trade.
That is the expense must not have a duality of purpose.
An expense with a duality of purpose would have both business and private elements, therefore any private element added back to profits.
2. The expense must not have a capital nature.
When an expense is a capital expenditure, this must be added back to the profit.
An asset would be classified as a capital expenditure if it is durable. An asset would be durable when it could last more than 2 years.
The business could claim capital allowance relief to reduce the tax due.
3. Items that are specifically disallowed by the legislation.
Examples of disallowed expenses.
- Depreciation or amortization of fixed assets.
- Private expenditures
- Salaries of sole traders and partners
- Client entertainment
- Fines and penalties
- Gifts except if they cost less than £50 and not food or tobacco and must bear clear advertisement for the business
- Legal fees that relate to purchasing or acquiring an asset. The exception to this is if the asset is a trading asset.
- Capital expenditure
My advice is to always keep a record of all business transactions whether digitally or in paper format.
Information like mileage of every business travel or purchase of business asset could save you a lot of tax.
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