Business Expenses
It is often a point of concern to clients who run
their own business that not all their expenses are
allowed by HM Revenue and Customs.
The general rule is that an expense must be 'wholly
and exclusively' incurred in running that business
for it to be allowed. This is wide and loosely drafted
concept with no strict definition in law.
Many expanses are straightforward – for example,
goods bought for resale, employees' salaries, advertising
and so on will be allowed, as long as they are incurred
'wholly and exclusively' in the running of the business.
Items never allowed by HM Revenue and Customs
Over the years, HM Revenue and Customs (HMRC) have
drawn up a list of items that are never allowed as
expenses of the business.
For instance, customer entertaining expenditure is
never allowed, so the cost of taking a customer out
to a business lunch is not deductible in working out
the taxable profits.
Some of the common items not allowed by HMRC include:
- Customer entertaining
- Depreciation (see below)
- Items used for private use
Depreciation and capital allowances
Depreciation is the 'wear and tear' on long-term assets
such as cars, computers and machinery, and it is shown
as an expense in the company's accounts.
HMRC do not like the way accountants calculate this
and insist that their own rules are used.
HMRC call depreciation capital allowances. This means
that allowance is made for the wear and tear of these
assets but the amounts worked out by accountants and
HMRC will differ.
Grey areas
There is a whole range of expenses that have specific
rules and should be handled with a great deal of care.
These include legal costs, repairs and leases.
For instance, legal costs are only allowed if they
are of a 'revenue' nature such as recovery of bad or
doubtful debts. The legal costs of buying a property,
however, would not be allowed as this is or a 'capital
nature'.
Repairs are generally allowed unless they are of a
capital nature. This is a very difficult area and you
will need the help of an accountant to determine the
correcttreatment.
If your business is about to incur significant expenditure
and you are unsure of its tax treatment, simply call
us here at Appletons! We will pleased to advise you.
