When is a business expense really tax deductible?
One of the most common questions business owners ask accountants, “Can I put this through the business as an expense?”
The answer depends on one core tax rule. For an expense to be allowable for Income Tax or Corporation Tax, it must be wholly and exclusively for the purposes of the trade.
This sounds simple, but in practice it is where many people get caught out when reporting expenses to HMRC.
What does “wholly and exclusively” mean?
In basic terms, the cost must be incurred only for your business and not have a personal purpose.
Wholly refers to the amount. If part of a cost relates to private use, you cannot claim all of it.
However, if you can clearly separate business and personal use, a reasonable split is usually acceptable.
A good example is a mobile phone or home broadband used partly for work and partly for personal reasons.
Exclusively refers to the purpose behind the spending. This is the more difficult part.
HMRC and the courts look at why the money was spent at the time, not just whether the business benefited.
The problem of dual purpose
If an expense has both a business and a personal purpose, it may fail the test entirely. This is known as duality of purpose and it is really important to determining allowable expenses.
A well-known example is clothing. Even if certain clothes are worn only at work, they still provide warmth and decency, which are personal benefits.
Because of that built-in personal element, ordinary clothing is not tax deductible.
Branded uniforms or protective clothing are different, as their purpose is clearly business related.
Meals are another area of confusion. Everyone has to eat, so normal day to day food costs are personal.
However, meals can be allowable where they form part of qualifying business travel.
If a cost has both a private and a business motive, it will normally not be allowable. That said, where an expense clearly includes a business element and a separate personal element, such as a mobile phone contract, the distinct business share can still be apportioned and claimed.
Be careful of mistaking a legitimate claim for an incidental benefit. These arise when a business expense is incurred wholly and exclusively for business purposes, but the person also gains a small personal advantage.
As you can see, the rules around expenses can be exceptionally nuanced at times and require more thought than just “running it through the business”.
How to assess your own expenses
When reviewing a cost, ask yourself:
- Would I have paid for this if I were not in business?
- Is there an obvious personal benefit attached to it?
- Can I clearly separate the business part from the private part?
If there is a genuine business purpose and any private element can be fairly apportioned, a claim is more likely to be accepted.
As with many things, the devil is in the detail when it comes to expense claims, which is why it is always best to seek guidance from a trusted professional adviser.
Getting help with expenses
Getting this wrong can lead to adjustments, penalties and interest if HMRC open an enquiry.
Keeping clear records and understanding the purpose behind each expense is also essential, just in case HMRC decides to challenge a claim.
We know that expenses can feel like a minefield at times, which is why our team are happy to offer advice so that you can make an allowable expense claim.
If you would like assistance with expenses, please speak to our experienced team today for advice.
