Sarah Bradford looks at whether it is possible to claim a deduction where there is both business and private use.
As a general rule, if you operate as a sole trader or unincorporated business you can deduct expenses incurred `wholly and exclusively’ for the purposes of the trade. Where an expense is incurred solely for the purposes of the business, this test will be met.
However, what happens if there is some private use? Will this mean that the test is not met and that no deduction is allowed, or is it still possible to claim a deduction for the business part?
In the real world it is not possible to separate everything into neat boxes labelled `business’ and `private’; business and private use collides and overlaps.
Consider, for example, a sole trader who needs a car for the purposes of his or her business and who also needs a car for personal use. Clearly, it would be slightly ridiculous for the sole trader to have to have one car solely for business use and another for private use in order to claim a deduction for the costs incurred in relation to a business.
HMRC recognise this, and consequently the extent to which it is possible to claim a deduction where there is both business and private use depends on whether it is possible to identify the business element.
The wholly and exclusively test does not have to be applied to the expense as a whole. If the expense can split into `business’ and `private’ elements and the wholly and exclusively condition is met in relation to the business part, a deduction will be allowed for that part. The split between business and private can be made using any reasonable basis for apportionment. What is appropriate will depend on the nature of the expense.
Suppose that Chris uses his mobile for business and private calls. He receives an itemised bill each month and can split his bill between business and private calls, claiming a deduction in respect of the business calls.
Julie is a mobile hairdresser. She has a car which she uses for both business and private travel. She keeps a log of all of her business miles in the year, her private mileage and her total mileage. She also keeps a record of motor expenses for the year (petrol, insurance, servicing, etc.) and claims a deduction based on the proportion of business miles in the year. In one particular year, she drove 12,000 business miles and 8,000 private miles. As her business mileage is 60% of her total mileage, she is able to claim a deduction for 60% of her motor expenses for the year.
Working from home
Many small businesses are based at home. It is possible to claim a deduction for the costs of maintaining a home office. For example, household bills could be apportioned by reference to the number of rooms.
Caroline provides exam tuition from home and uses one room solely for this purposes. She has eight rooms in her house and claims a deduction for one-eighth of her household bills, such as electricity, gas, council tax, mortgage interest, etc. Other ways of apportioning the costs that she could have used would include floor area or time spent on the business.
Keep it simple
To save the need to keep detailed records and perform an apportionment calculation, simplified expenses rules can instead by used to determine the permitted business deduction. Simplified expenses can be used to claim a deduction for motor expenses based on the number of business miles or for office use of home by reference to the number of hours worked on the business each month. Simplified expenses can also be used to disallow the private element where business premises are also used as home. For further details on simplified expenses, see www.gov.uk/simpler-income-tax-simplifed-expenses-overview.
Use simplified expenses to claim a deduction for business costs to make life easier.
Where expenditure has a dual purpose and cannot be split between business and private elements, the wholly and exclusively test is not met and consequently no deduction is allowed. Examples of expenditure with a dual purpose include food and drink taken for sustenance, and ordinary clothing which provides warmth and decency (even if designated as `work clothes’). Deductions are, however, permitted for subsistence and for special work clothes (such as protective clothes) and uniforms.
Even if there is private use, if you can identify a business element, a deduction can generally be claimed to the extent that the expenditure relates to the business part.
This article was first printed in Tax Insider in October 2016.