For the self-employed, the broad rule is that expenses are allowable if they are ‘wholly and exclusively’ incurred for the purpose of your business.
Some expenses, such as your phone contract, which may include both personal and business calls, don’t seem to meet this rule but are still allowed. This is because the legislation also says that when an expense is incurred for more than one purpose, a deduction is permitted for any identifiable portion of the expense which meets the wholly and exclusively rule – so your phone bill can be split between business and personal use, in accordance with the proportion of use for each.
Anything you buy which will be used in the long-term is classed as a capital item and cannot be deducted directly as an expense (unless the cash basis is being used). However, most capital expenses will still get full tax relief in the form of capital allowances, so in practice this doesn’t make much differenct to a small business.
The tax treatment of common expenses is explained below.
The cost of ‘Ordinary Commuting’ is not tax deductible. Travel between home and work can qualify as a business journey when the home is the operating base of the business.
This has been the subject of many cases in the tax tribunals, with varying outcomes depending on the particular circumstances:
- a building contractor was allowed to claim for travel between home and different building sites as he kept his tools at home, managed his business from home, and had no fixed workplace (Horton v Young).
- A doctor had an office at home, held clinics at two hospitals, and visited patients at home. Travel expenses between home and either clinic were not allowed, as the clinics were fixed workplaces. Travel between home and patients’ homes was allowed, as patients’ homes were not fixed workplaces (Samadian v HMRC).
If a journey is undertaken wholly and exclusively for business, all travel and subsistence costs should be allowable for tax.
If a journey is made in a private vehicle, either the actual expense or a mileage allowance can be claimed.
Actual expenses include all running costs, such as fuel, servicing, MOT, repairs, insurance, road tax, tolls, purchase cost and associated finance.
A proportion of these expenses is disallowed based on how much the vehicle is used privately. Reliable records should be kept to distinguish between business and private use.
To use the mileage allowance, business miles travelled are simply multiplied by the mileage rate.
Mileage rates are currently 45p per mile for the first 10,000 miles in a car and 25p for subsequent mileage. Motorcycle rates are 24p per mile for all travel.
The allowance covers all costs of purchasing and running the vehicle, not just petrol, so it can’t be used if capital allowances have already been claimed for that vehicle in a previous tax year.
Subsistence – food, drink and accommodation – is an allowable expense in circumstances where travel expenses would be allowable, and either the taxpayer is involved in work with no permanent workplace (described in the legislation as “itinerant”), or the travel is occasional and not part of a normal pattern of travel. Generally, subsistence is allowable in circumstances where travel is allowable.
Working from home
All costs incurred directly for business purposes can be claimed. Additionally, a proportion of the running costs of the home, such as heating, lighting, council tax, insurance, repairs, cleaning, rent or mortgage interest can be claimed, based on the particular circumstances.
Alternatively, a fixed monthly allowance set by HMRC can be claimed, based on the hours worked at home.
A self-employed person cannot rent their home to themselves.
If part of the home is used exclusively for business it will affect main residence relief when the home comes to be sold.
To be tax deductible, training must be ‘wholly and exclusively’ for the purpose of the trade. So on-going training or development to maintain skills is allowed, but where there is a personal benefit the cost is not allowed, as it has not been incurred ‘exclusively’ for the trade.
Training to obtain a new skill or qualification – for example initial training needed before the trade can begin – is not allowed, as this is viewed as creating an enduring asset of benefit to the individual rather than the trade.
The cost of training and course fees for employees is an allowable expense for the employer, including training employees in new skills, so long as the training is work related.
The cost of entertaining clients or third parties is specifically disallowed for tax purposes. VAT on entertaining also cannot be reclaimed, apart from in some circumstances where overseas customers are entertained.
Staff entertaining is allowable for the business, but may give rise to a benefit charge to the employee.
Where family members are employees, the cost of entertainment for them is allowable in the same way as for any other employee.
Most clothing is not bought ‘wholly and exclusively’ for the purpose of the business, as clothing must be worn in any case to provide warmth and decency. Therefore, the cost of everyday clothing and smart clothing is not allowed as a tax deduction.
Protective or specialist clothing bought exclusively for work is allowable. Examples would be helmets, protective boots, overalls, high visibility clothing, branded clothing or performers’ costumes.