Claiming business expenses

You’ll of course have various expenses when setting up and running your business. Some will be subject to tax and others won’t. You’ll therefore have to report all your expenses to the Inland Revenue for tax purposes when you complete your tax returns, whether or not you’re VAT registered or operating as a sole trader, partnership or limited company. The Inland Revenue classifies expenses as allowable and non-allowable, depending on whether they are subject to tax. 

Allowable business expenses are for items or services that you have purchased for business purposes, i.e. for the purpose of making profit for your business. These may be, for example, stock items that you have purchased to resell, raw materials that you purchase to manufacture the goods that you sell, rental of premises, payment of utility bills for your premises, office or factory expenses such as printing, postage, stationery or maintenance, sales costs such as advertising, travel and subsistence expenses or membership, subscription fees to professional bodies or trade organisations, some legal expenses, some bank account charges or the interest or fees on loans or other finance arrangements, or the costs of employing staff – salaries and bonuses etc.

Non-allowable business expenses are those that are not tax deductible. This includes any personal expenses, the cost of purchasing premises or equipment, corporate entertainment costs, charitable gifts or donations, or costs that can be recovered through insurance.

Although you can’t claim for the cost of capital equipment as an allowable business expense, you can get tax relief on your capital expenditure by claiming capital allowances, although there are limits to how much you can claim back for certain types of expenditure and you may not always be able to recover the full cost of each purchase. Capital allowances work by allowing you to deduct a percentage of the cost of an expense from your taxable profit, thereby reducing your tax bill. Capital allowances can be claimed for expenses such as the purchase of or cost of improving business premises, the cost of machinery, vehicles or equipment and research and development. You can claim the allowance for more than one year, but in most cases the allowance will be reduced for subsequent years.

Claim your capital allowances when doing your income tax or corporation tax return. Claims for each accounting period should be made separately. VAT registered businesses can only claim capital allowances on the net costs of their purchases, whereas non-VAT registered businesses can make a claim against the total cost.

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