Running a business involves incurring costs, whether you're a start-up purchasing a web domain or a multi-million-pound communication agency investing in new computers for your team.
In the UK, many businesses can benefit from ‘allowable’ business expenses, which can reduce your overall tax burden. But what exactly are allowable expenses? Read on to learn more.
What are allowable expenses?
Simply, an allowable expense is one which HMRC considers to be an essential cost associated with operating your business. Allowable expenses can help in reducing your overall tax burden.
“For anything to be an allowable business expense, the rules come back to three things: It’s got to be wholly, exclusively and necessarily incurred for your trade,” suggests Nick Ledgard, Practice Partner of Walker & Sutcliffe Chartered Accountants.
Businesses need to spend money to function, even if that’s just paper for the printer or postage stamps for parcels. But allowable expenses can cover a range of business costs, some of which are less obvious than others.
For example, there is an allowance of £150 per person for social functions and events throughout the year, “because it is good business to keep your employees engaged,” Ledgard reveals. “That’s why Christmas parties are allowable because they are necessary for your trade.”
Will Simmonds, Managing Director of events venue, Glaziers Hall, in London, reveals that a lot of the venue’s expenses are “standard fare” which refers to typical or common business expenses that are regularly incurred. These expenses often include items like consumables (like office supplies), computers, and other day-to-day operational costs.
Are all business expenses allowable?
Not all business expenses are allowable. Certain expenses are not allowable for tax purposes. Examples include client entertainment costs, fines or penalties, charitable donations without Gift Aid, and most general legal fees. It's important for SMEs to be aware of these exclusions to maintain compliance and accurately manage their expenses.
The list that follows is a broad explanation of what may or may not be an allowable business expense, but, as Ledgard points out, each individual business's circumstance is different. "There is legislation but a lot of tax is case law or precedent driven," Ledgard explains. "Which means it can come to whether or not a point [in one case] is exactly the same as the one that has already been ruled on. There are a lot of grey areas." If in doubt, consult a qualified tax advisor for advice on your own specific needs.
Revenue vs capital expense
There are two main types of expenses, and they are accounted for slightly differently when it comes to reporting your expenses – revenue expenses and capital expenses. Essentially, they come down to whether or not they are ‘consumables.'
Ledgard explains: “A revenue expense is something you would use instantly while capital expense is something that is used over a number of accounting periods. Think of a pad of paper – that’s a revenue expense, you use it once and throw it away. A computer, you can keep using over and over again.”
Reporting your capital expenses is not quite as straightforward as revenue ones, as issues such as depreciation must be taken into account. On your balance sheet, a capital expense, like a computer, will be ‘capitalised’. In other words, a percentage of its value will be allowed as depreciation.
“However, thanks to the annual investment allowance, you get a 100% write-off on any asset that you buy. So, even if you capitalise your £1,000 computer and put it on the balance sheet, you will also get the full value in tax relief in that first year – so £1,000 will be allowable,” Ledgard adds.
Work travel
Any time you have to travel for work, such as to a conference or visiting clients, the cost is an allowable expense. There are specific rates per mile for fuel, or you can claim a rail, bus or plane fare. However, commuting in itself is not an allowable business expense.
Rent and utilities
The cost of running your business day-to-day from business premises – otherwise known as your overhead costs – is an allowable business expense for tax relief, including rent, telephone, internet, heating, light and water. Different rules apply if you are using your home as a place of work, either full-time or as part of a hybrid working arrangement.
Inventory
The items you purchase either to resell or to create a product for sale are included in business expenses tax relief.
Financial costs
You can reclaim any bank or insurance charges as long as they are wholly for business use. For example, you can reclaim tax on insurance premiums for your premises but not for the personal car you use to drive to work.
Business equipment
Everything that is used only for business including stationery, furniture, computer equipment and even uniforms, not including business suits, are allowable business expenses.
Which expenses are excluded from tax relief?
It’s important to note that, just because you can’t claim tax relief on various types of business expenditures, you are still allowed to buy them using business money, you just won't benefit from tax relief.
Client entertainment
Taking clients to lunch or the theatre is not an allowable business expense. However, that is not to say that you cannot consider it an important part of building relationships and therefore a worthy investment.
Fines
Sadly, if you couldn’t find a good parking space, or your meeting overran, you can’t claim tax relief on the resulting fine. Any other fines or fixed-penalty notices cannot be filed as allowable business expenses.
Legal fees
While there are a few fees you can claim on business expenses, including those for registering trademarks and arranging loans, most are not allowable business expenses. Legal costs associated with a stolen idea or product, for example, are not allowable business expenses.
How to track your allowable expenses
Making the most of the available solutions is key, with a wide range of technologies available to manage your business expenses effectively. Simmonds notes: “We use accounting software and that gives us real-time information. The benefits of technology mean that there is constant visibility of spend through online banking, corporate cards and so on. Joined-up technology is critical to what we do as a hospitality business.”
Making the most of that visibility is important to maintaining a healthy cash flow. Using all available grants to minimise expenditure is just one element. Knowing your position day-to-day and taking advantage of payment terms to adjust your spending is crucial.
The American Express® Business Gold Card gives you the flexibility you need when it comes to your payment schedule. Longer payment terms of up to 54 days mean you can invest in higher-quality materials or time-saving tools when you spot opportunities, giving you more time to see the return on your investment before paying out¹.
Plus, you can make business allowable expenses work harder by earning 1 Membership Rewards® point for every full eligible £1 spent² – points can be redeemed as a statement credit to offset your business expenses.
Simmonds also points out that, as a relatively small team in a fully open-plan office, some of the best ways to communicate are simply to talk to each other. However, he recognises that in other businesses where the finance team are separate, this may not be an option.
But even with transparency in technology and open channels for conversation, things like expense policies are important. “We have a very clear policy in place which is for our employees’ own comfort and protection. There’s nothing worse than having a difficult conversation with someone who has acted entirely innocently and thought they were doing something that was permitted,” Simmonds warns.
1. The maximum payment period on purchases is 54 calendar days on Business Gold & Business Platinum Charge Cards and 42 calendar days on the Business Basic Charge Card, it is obtained only if you spend on the first day of the new statement period and repay the balance in full on the due date.
2. Membership Rewards points are earned on every full £1 spent and charged, per transaction. Terms and conditions apply.
3. The information provided in this article is for informational purposes only and does not constitute financial advice. Always consult a qualified professional before making financial decisions. We are not liable for any actions taken based on this information.
