Meg Saksida highlights tax deductibles that are potentially available to businesses.
HMRC receipts from personal tax grew by nearly £29 billion last year, to £622 billion. This is just short of a 5% increase, when inflation in the UK in 2018 was only 2.48%.
The cost of personal tax has increased over the last five years by £107 billion, again without a corresponding percentage increase in inflation. In these times when taxes are becoming correspondingly a more onerous expense in our households, how are we to mitigate our liability?
The definition of ‘personal tax’ in these statistics covers a number of taxes and duties, but 75% of the revenue comes from income tax and NICs, capital gains tax, and VAT, with income tax making up nearly £200 billion of the total receivable.
For sole traders and partnerships, the total revenue received less the tax-deductible expenses of the business (i.e. the taxable profit) is charged at the personal tax rate of the individual which could be up to 45% (plus class 2 and 4 NICs). It stands then, that the more tax-deductible expenses a business has, the less taxable profit is made, and the less income tax is charged.
What expenses are tax deductible? Only those that are ‘wholly and exclusively’ incurred for business purposes.
Trading allowance
For very small sole trader businesses there is the option to offset the £1,000 ‘trading allowance’, even if expenses are under this amount. This is automatic if turnover is less than £1,000, and does not have to be disclosed to HMRC.
Staffing costs
For larger businesses, the biggest expense will usually be the cost of the employees. Their salaries, bonuses, benefits, pension costs and the associated employers’ NICs can all be offset against income. Personal staff costs such as gardeners and nannies are not deductible.
Premises costs
The cost of the premises, such as rent, rates, utilities, insurance, and office consumables such as postage, printer ink and stationery are deductible. Software on recurring licences can be claimed, or if it’s used for less than two years. Mobile phone and internet expenses, advertising and marketing costs are also allowable.
Travel costs
Travel can be offset, including hotel and subsistence costs. Travel expenses include the cost of fuel, insurance, breakdown cover, repairs, servicing and parking a car, or the costs of public transport. Remember the wholly and exclusively rule; costs can only be deducted if the journey is a business one. Home to work commuting is not.
Clothing
You can claim for uniforms and costumes required for both your staff and you, and for protective clothing such as steel capped boots. If the clothing is deductible, so too is the cleaning of it. You can’t claim anything for clothes you could wear outside of work even if you don’t or wouldn’t.
Legal and finance
Legal and financing costs are deductible, such as solicitors, accountants and other professionals fees for business purposes. Professional indemnity premiums are included here too. Bank charges and interest are deductible, but beware there is a £500 limit on the same if you are using cash accounting. You can’t offset any penalties/fines for breaking the law.
Advertising and marketing
You can deduct advertising, marketing and website costs, but you cannot claim for entertaining clients or suppliers. Don’t forget to deduct professional membership fees and subscriptions to trade/professional journals.
Other membership fees
Much as it may make you a better entrepreneur, you can’t deduct gym, golf or social club membership fees.
Practical tip:
Ensure you deduct every possible expense you legally can, in order to ensure you pay the minimum of income tax.
