Business expenses – what can I claim?

If you are self-employed you can claim tax relief on a lot of things.  It is, of course, important that you don’t try to claim relief on the wrong things. To do so can get you into some bother with the tax-man.  And of course there could be an extra tax bill to pay.

The legal rule for what you can claim against your business is that you can claim for items ‘wholly and exclusively’ bought for the business.

But many’s an hour of expensive time has been spent with accountants and tax inspectors arguing about whether an expense was wholly and exclusively for the business.  The most serious cases end up argued before the Courts.

There was the farming partnership trying to justify use of a Rolls Royce for the farm.  End result – a reduction in the tax relief as part of the vehicle choice was personal.

Then there was the barrister claiming her black work clothes saying she would never ever wear them socially.  Result -–they COULD be worn socially so tax relief was denied as the clothes afforded the private pleasures of warmth and decency.

In fact HMRC does not insist that an item of expense must be wholly for the business.  They merely require that tax relief only is given on the business bit.

So this means if you run a car in your business and use it privately then tax relief is still due.  If it costs £3,000 per year to run and one third of the miles are on business then you can have tax relief on £1,000.

Normally you can claim tax relief on repairs to business premises or equipment.  There are, however, circumstances where even this can be in jeopardy.

If you buy an asset (equipment or building) very cheap because of the appalling state it is in then you may not be allowed the repairs as a tax expense.  This is based on an old legal case but the logic is that you bought the thing cheap because it was dilapidated.  Thus the initial repairs are treated for tax purposes as if they were part of the original purchase.

So if you spent £6,000 on the machine and then immediately spent £2,000 on repairs then the tax office would deny the tax relief on repairs of £2,000.  The asset would be treated as costing £8,000.

I am not saying that no tax relief is available on the asset – just that the special rules for capital allowances would apply on the whole £8,000, not the £6,000. So tax relief may be slower in coming around.  When premises are bought there generally will not be capital allowances, so the denial of tax relief on what you called the initial repairs can be quite bad for you.

Entertainment of customers is very common in some businesses.  No – you can’t claim tax relief.  People still think you can in certain circumstances – they are wrong.  The rules changed years ago.

This is not the tax-man’s way of saying you are wrong to entertain people to advance your business, just don’t ask for tax relief.

What you need to remember is that the denial of the tax relief means entertaining becomes an expensive way of promoting your business.

For example if you pay 40% tax, then an advertisement for £100 will end up costing you £60 after tax relief.  But taking an important contact for a £100 meal will cost you the full £100.

So think carefully about entertaining expenses.