How to Maximise Deductions for Business Expenses

Allowable Business Expenses for Sole Traders and Partnerships

When working out the profits or losses of your business, you can deduct any allowable business expenses that you incur in running your business to arrive at the profit (or loss) figure before tax. The more expenses you deduct, the lower your taxable profit and the less tax you pay. Yet there is a lot of confusion as to what can and cannot be deducted.

Written by Chartered Accountant and Chartered Tax Adviser Sarah Bradford, this special report presents you with a comprehensive view of the ways to maximise business expenses for unincorporated businesses, such as sole traders and partnerships. This means you can claim more tax deductible business expenses, pay less tax and keep more of your profit.

What Are Allowable Business Expenses?

Allowable business expenses are the costs you can deduct in working out the taxable profits of your business. The basic rule is that a deduction is allowed for expenses incurred wholly and exclusively for the purposes of the trade. Unlike the equivalent rule for employment expenses, there is no requirement that the expense is ‘necessarily’ incurred.

Not every business cost qualifies. No deduction is given for private expenditure, capital expenditure is generally not deductible unless the cash basis is used, and some expenses, such as business entertaining, are specifically disallowed even where they are incurred wholly and exclusively for the business.

Claiming Business Expenses: Common Errors and HMRC Risk

Mistakes can go either way. When business and private spending are mixed, it is easy to claim a deduction for items that are not allowable, which may attract unwanted attention if HMRC takes a look, or to pay for business items from a personal account and fail to claim for them at all.

HMRC produces toolkits for tax agents that focus on the errors it most commonly finds, from record-keeping, personal bills, travel and subsistence and entertaining to the split between capital and revenue expenditure. Some of the distinctions are fine ones: an expense with an identifiable business portion can be apportioned, but one incurred for a dual purpose gets no deduction at all, even where the business purpose is the main one.

What This Report Covers

In 18 chapters, with worked examples, practical tips and traps to avoid throughout, you’ll find a comprehensive list of tax deductible business expenses and learn more about:

• The wholly and exclusively rule
• Capital vs revenue expenditure
• Timing of deduction
• Pre-trading expenses
• Post-cessation expenses
• Allowable business expenses and non-allowable expenses
• Travel and subsistence expenses
• Entertainment expenses
• Staff expenses including pension contributions
• Professional and subscription expenses
• Home office expenses including simplified expenses
• Premises costs

And more. Take a look inside the report now to see how much there is to learn about allowable business expenses.

The wholly and exclusively rule and mixed-use expenses

Why no deduction is given for private expenditure, how mixed-use expenses such as a mobile phone or a car used for both business and private purposes are apportioned on a just and reasonable basis, and why dual-purpose expenditure gets no deduction at all, drawing on cases such as Wildbore v Luker and Mallalieu v Drummond. The report also takes you through HMRC’s private and personal expenditure toolkit and its checklist, which can bring to light deductible expenses that have been overlooked.

Capital v revenue expenditure and the cash basis

How to tell revenue expenditure from capital expenditure when there is no single test, and how relief is given: through capital allowances under the accruals basis, or as a deduction under the cash basis unless the item falls within the limited disallowance, which covers cars and land among other items. It also covers HMRC’s capital v revenue expenditure toolkit and its risk areas: the acquisition, improvement and alteration of assets, legal and professional fees, finance costs and IT costs.

Timing, pre-trading and post-cessation expenses

When a deduction is given under the accruals basis and under the cash basis, and two planning rules for timing expenditure: secure a deduction as early as possible, or at the highest possible rate of tax. You will also learn how relief is given for expenses incurred before the trade starts, why expenses relating to the cessation itself are disallowed, and the order in which post-cessation expenses are relieved, including post-cessation trade relief against total income and capital gains.

Travel, subsistence and entertaining

Why home-to-work travel is not deductible unless home is the base of operations, as the cases of Newson v Robertson and Horton v Young show, how to treat trips that mix business and pleasure, and when a fixed-rate mileage deduction under simplified expenses saves work. The report also explains when meals and overnight accommodation can be claimed, what counts as business entertainment, and the main exception for staff entertaining.

Staff costs, professional fees and interest

What can be deducted for wages, employer’s National Insurance, benefits in kind, pension contributions, statutory payments and staff training, and why dividends are not a business expense. The report also covers professional fees and subscriptions, interest and finance costs, including loans secured on your home and loans that end up funding private spending, and when key person insurance premiums are deductible.

Home office, premises and record-keeping

How to claim for the fixed and running costs of a home office, or use a fixed-rate simplified expenses deduction instead, how the private use disallowance works if you live in your business premises, and the capital gains tax ‘trap’ of using part of your home exclusively for business. It also explains the difference between a repair and an improvement to business premises, and the records you need to support your claims, including the digital records required under Making Tax Digital.

Who Will Benefit From This Report?

Any sole trader or partnership, large or small, that wants to save money on taxes will benefit from this report, which explains the rules for unincorporated businesses. If you’re wondering what allowable business expenses you can claim or what business expenses are tax deductible, this report is for you.

This report is also popular among accountants and tax professionals.

About Sarah Bradford FCA CTA

Sarah Bradford BA (Hons), FCA, CTA (Fellow) is a Chartered Accountant and Chartered Tax Adviser, and the director of Writetax Ltd, a company providing technical writing services on tax and National Insurance.

Sarah writes widely on tax and National Insurance and regularly contributes to Business Tax Insider, Property Tax Insider and Tax Insider Professional. She is also the author of Tax-Efficient Ways To Extract Cash From Your Company, IR35 – Tax Tips for Contractors, Tax-Efficient Business Exit Strategies, Cash Basis for Landlords, Directors’ Loan Accounts Explained and Property Company v Property Trust.

Read an excerpt from this report: Wholly and exclusively business expenses - Tips and traps.