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  • Allowable business expenses: what are they?

    March 28, 2017

  • The new tax year is almost upon us, and it's always good to start it as you mean to go on: with impeccable record keeping.

    One thing that's essential to keep track of is your allowable expenses.

    In brief

    Allowable expenses are essential costs to keep your business running properly. They're tax deductible, which means you don't pay tax on the money you've spent. If, for example, you made £30,000 last year but spent £5,000 on allowable expenses, you would only be taxed on £25,000. Only certain things can be put down as an expense, however, and to stay on the right side of HMRC, it's important to understand what's allowed and what's not.

    What you can claim

    Allowable expenses include your basic office costs such as stationery and the bills you pay on your business phone. Travel costs and staff salaries are also included, as is the cost of a uniform or other appropriate clothing (for example, if you work in a skilled or manual trade). The cost of your business premises are covered, so keep receipts for any office rental or co-working space. Advertising and marketing costs are included too, so if you've paid money for a new website it will be tax deductible. Things you buy to sell on are also included.

    Some financial expenses, such as professional indemnity insurance premiums and the interest on your business loans, are allowable. Overdraft, credit card and bank charges are also covered, as is the cost of hiring an accountant.

    What you can't claim

    If you break the law and are fined, you won't be able to claim it back (another good reason to take out a professional indemnity policy), so keep an eye out for parking restrictions. If you buy a new property, you can't claim for the associated legal costs (although these can be claimed as capital allowances). As for travel expenses, you can only claim for business trips, not for daily travel between home and work.

    You can only claim staff costs for people who work in your business: so you can claim for a personal assistant, but not for a cleaner or nanny. Although entertainment is a big part of winning (and keeping) clients, entertainment costs aren't covered.

    Proportional costs

    If you work from home you can claim a proportion of your bills as allowable expenses. This includes heating, electricity, internet and telephone, mortgage interest or rent and council tax. Because you're using the property for personal use as well, you can't claim your full bill.

    You will need to find a fair (and sensible) method for calculating the right proportion. One way to do this is by working out how many rooms are in your home, and what proportion of the time you use your office space for work, and dividing your full annual bills by these to work out a percentage.

    An easier option is to use the government's simplified expenses, a flat rate based on the number of hours per month you work from home. This is likely to be less (and less accurate), but will save you time.

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