Significant amounts of tax can be saved by ensuring that you claim a deduction for all allowable business expenses. Generally, these are expenses which are incurred in the course of earning profits for the business.
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The general rule is that business expenses can be deducted when calculating taxable profit as long as they are incurred wholly and exclusively for the purposes of the business. Consequently, you cannot deduct private expenses when calculating your taxable business profits (but see Tip 35 for dual-purpose expenditure).
This test is less stringent than the corresponding test for deductibility of employees’ expenses, which also requires that the expense was necessarily incurred in performing the duties of the employment. There is no requirement that it was necessary to incur a business expense for it to be deductible, only that it was incurred wholly and exclusively for business purposes.
Where accounts are prepared using the accruals basis, a deduction is not given for capital expenditure, for which capital allowances may be given instead (see Chapter 5).
Where the trader has elected to use the cash basis (see Tip 25), relief for capital expenditure is given in accordance with the cash basis capital expenditure rules (see Tip 53). These allow capital expenditure to be deducted when computing profits unless the capital expenditure is of a type for which such a deduction is specifically disallowed (as is the case for land and cars).
To ensure that deductible expenses are not overlooked, it is important that good records are kept, together with invoices and receipts.
Example
Judd has a small business, which he runs as a sole trader. For the year in question, he incurs business expenses of a revenue nature of £12,000. The expenses are incurred wholly and exclusively for the purposes of his business.
The business expenses are deducted from turnover in the calculation of his taxable profits.
Had he omitted to deduct the expenses he would have paid unnecessary tax. This would have cost him £2,400 (£12,000 @ 20%) if he is a basic rate taxpayer and £4,800 (£12,000 @ 40%) if he is a higher rate taxpayer. It is important that records are kept of all business expenses.
Claim A Deduction For The Business Element Of Dual-Purpose Expenses
Although you cannot claim a deduction for private expenditure when computing business profits, if costs are incurred for both business and private purposes, you can claim a deduction for the business proportion where this can be separately identified. This situation may arise where a person uses his or her car, computer or mobile phone for both business and private purposes.
The costs must be apportioned between the business and private elements on a just and reasonable basis. For example, an itemised phone bill could be used to identify business and private calls. Likewise, a mileage log could be maintained to identify the split between business and private travel in a car used for both purposes.
Example
Mark is a sole trader. He has a mobile phone that he uses both for business and private calls. He prepares accounts to 31 March each year. In the year to 31 March 2024, his mobile phone bills came to £1,200. He works out that 90% of his calls are for business and the remaining 10% are personal. Mark is able to claim a deduction of £1,080 (£1,200 @ 90%) when computing the taxable profits of his business.
