It is important to keep good records of business expenses so that any expenses that can be deducted are not overlooked.

The general rule…

The general rule is that a deduction is allowed for expenses incurred wholly and exclusively for the purpose of the trade, profession or occupation. Unlike the equivalent rule for employment expenses, there is no requirement that the expense is ‘necessarily’ incurred. This means that as long as an expense is incurred for the purposes of the business and only for that purpose, a deduction is given.

Private expenses are not deductible

No deduction is given for private expenditure and under no circumstances should private items be `put through the business’. It is good practice to keep private and business expenditure separate and to have a separate bank account for business expenses. If you run your business as a limited company, the company should have its own bank account.

Mixed use expenses

If you incur an expense for both business and private purposes, you can deduct the private element if this can be separately identified. For example, this may be the case if you use a phone for business and private calls. Any apportionment should be on a just and reasonable basis. If you cannot separate out the private use and the expense has a dual purpose (such as work clothes which also provide warmth), the expense should not be deducted.

Common deductible expenses

The actual expenses that can be deducted will vary from business to business – what is important is that they are incurred wholly and exclusively for the purpose of the business.

Common examples of deductible business expenses include:

1. Cost of goods sold, such as raw materials and goods bought for resale.
2. Distribution and packaging costs.
3. Office expenses, such as stationery and printing costs and phone bills.
4. Travel and subsistence expenses, such as fuel, parking and fares for using public transport and hotel bills for overnight business trips.
5. Motor expenses, such as car insurance, MOTs and repairs.
6. Staff costs, such as wages, salaries, employer’s National Insurance and pension costs.
7. Rent and rates.
8. Gas, electricity and water bills.
9. Repairs to business property.
10. Advertising and promotion costs.
11. Bank interest and other finance costs.
12. Accountancy, legal and other professional costs.
13. Uniforms (but not general clothing even if only worn for work).

Non-deductible expenses

A deduction for certain expenses is expressly prohibited. This includes the cost of business entertaining, which if deducted in computing accounting profit must be added back to arrive at taxable profit.

Likewise, depreciation (an accounting concept) is not deductible in arriving at taxable profit; instead relief is given in the form of capital allowances.

If you aren’t sure if your expense is deductible or not then please highlight these or let us know when we are working on your accounts and we can make a note of these and discuss with you.