Claiming Expenses – The Basics
You may remember our previous blog post on having an office at home (if not, have a look here). This week we’ll be talking about – on a more general level – what you can claim against your tax bill as a business owner or company, or if you are self-employed.
What do we actually mean by claiming against tax? Essentially, your business’s taxable profits are reduced by the value of any eligible expenses that you incur. The tax is reduced.
The key criteria determining what you can and can’t claim are as follows;
- Was the expense incurred “wholly and exclusively” for the purposes of business?
- Did you use it for business, or private use? If both, how much was for business use?
- Is it a revenue expense, or capital expense (i.e. is the expense ‘used up’ in the day-to-day running, or not?)
There is no complete list of all the things you can claim, but there are guidelines and a list of things that aren’t covered. Which is helpful.
Wholly & Exclusively
This has been covered in the previous blog post, and is pretty straightforward. Generally, you should ask yourself ‘Did I benefit personally from this expense?’ If the answer is yes, then it doesn’t qualify. A common question is about client entertainment – lunches, dinners, trips to a football match; these can’t be claimed, even if you get business as a consequence. Likewise, clothing doesn’t satisfy the criteria, unless you are legally required to wear particular safety gear to prevent injury and death, for example.
Business vs. Private use
Money can be claimed, to an extent, with mixed-use expenses. If you have one car that you use for both visiting clients and picking up the shopping, for example, you can claim some money for the business use. How much is determined by the exact split (or apportionment, in accountant-speak) between the two uses – it is therefore very important to keep track of the exact mileage that you’ve driven for both. In the case of a car, you apply this apportionment to the entire running costs of the car, things like petrol, insurance, repairs etc. Another example covered previously would be phone bills – these are clearly itemised, so you can see an exact figure to claim.
Revenue or Capital Expense?
This is something that is less well known. All expenses can be split into revenue or capital expenses. A revenue expense, as stated above, is something that will be used up during the day-to-day running of the business. So for example, in an office, things like stationery, heat and light would all be considered ‘used-up’. Capital expenses, on the other hand, are ‘fixed’ – tools, equipment, computers, printers and car etc. – things that won’t be used-up. ‘Fixed intangibles’ such as patents, copyrights, trademarks and brand names are also classified as capital expenses.
So why does this matter? Well, because revenue expenses can be completely claimed for the trading period that they are incurred in. Capital expenses are often not eligible, but if they are, then the cost may be spread out using the Capital Allowance scheme if it qualifies (the criteria can be found here).
Annual Investment Allowance (AIA) and Writing down
For most small businesses, your expenses will be covered by the AIA. The AIA allows you to claim 100% of all capital expenses up to a certain amount against your taxable profits (does not apply to cars). For the 12/13 tax year, this amount is £25,000. Anything above this threshold can be partially claimed, or written down, which allows you to claim 18% (12/13 tax year) of your expense above the AIA threshold each tax year.
Example: You buy manufacturing equipment that costs £50,000. £25,000 of this is covered by the AIA, leaving the remaining £25,000. You can claim tax relief on £4500 (£25,000*18%), which if you are a basic rate tax payer saves you £900. The remaining £20,500 is then added to the pool, which can be claimed against at the same rate each year.
One thing to note is that you can only claim your AIA on expenses in the year that you bought them. So, from the example above, the £20,500 remaining from year 1 does not fill your AIA in the second year. Even if you didn’t fill any of your AIA in year 2, you could still only claim on 18% of the pool value.
So if you have any queries about the things covered here, get in contact and we’ll be happy to help you.