To give you a better understanding of which costs are allowed and which are not allowed, we’ve highlighted the main areas where business owners habitually trip up with their expense claims.
The starting point for working out if expenses are (or are not) deductible for tax is the total costs shown in your company accounts. Take a look at your profit and loss (P&L) report in your accounts and you’ll see a list of all the expenses you’ve incurred over the period.
Once you have a list of your total costs, you can then follow the guidelines in the Government’s legislation to disallow some of these costs. At this point, you can also make any allowable deductions that weren’t included as costs in your standard accounts.
Disallowed costs are the expenses that can’t be claimed against tax. These disallowed costs fall into two main groups:
Where fixed assets such as a van, a computer or a piece of machinery is purchased, the accounts will include a depreciation charge each year. This is intended to spread the cost in the accounts over the life of the asset. Although these depreciation charges are shown as expenses in the accounts, they’re added back to profits (i.e. disallowed) when working out how much corporation tax is due.
There is specific legislation which, in many cases, allows an alternative deduction. An alternative deduction can be made via the:
It’s fairly easy to identify capital expenses that must be excluded. But knowing if expenses were incurred ‘wholly and exclusively for the purposes of trade’ can be more difficult.
Where expenditure has been incurred for a dual purpose (business and non-business) the whole of the expenditure is disallowed. This is commonly where many business owners fall down when claiming for costs that are actually excluded.
Just to add to the complexity, some expenses that are not incurred for the purposes of trade are specifically allowable for tax purposes. These include redundancy costs, retraining costs and pre-trading expenses (but only those that would be deductible if incurred after trade started).
It’s important to make sure your expenses are given the correct tax treatment. Making a mistake can result in you paying either too much tax or becoming liable for penalties.
As with all matters related to tax, the rules are complicated and often unclear. Working with an experienced tax adviser makes good sense and helps you get on top of your expense claims.
We’ll help you maximise the potential tax deductions by advising you on any grey areas. Get in touch to talk through your allowable expenses.r your new post
If you’d like to improve your company’s financial performance, or don’t feel you’re getting enough support from your current accountant, book your free discovery call with us today.
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