All businesses pay tax based upon what profits they make, once the profit is calculated the relevant tax rate is applied to this to calculate the amount of tax due. To arrive at a profit a series of allowable costs are deducted from the business’s turnover. The rules are sometimes logical and other times odd or seem unfair. We have therefore produced the following summary to help clients and prospective clients understand the rules.
Cost of Sales
As one would expect the costs of manufacturing the product sold or delivering the service provided are entirely allowable; this includes the materials and labour costs and other direct costs such as electricity or gas relating to a manufacturing process. The only odd item here is depreciation of equipment used in the processor to deliver the service, The treatment of this cost is covered in the section below entitled capital costs.
Staff Costs for all staff employed in the business are allowable, provided that they are carrying out duties that benefit the business. These costs include the gross salary of the employee plus the employer’s national insurance and the costs of providing any benefits; pension contribution, private health insurance, child care, training costs, and Company car costs are all examples of these.
Rent and Rates in respect of the business’s premises are allowable as is the insurance, and repair costs for the premises. Where a business is operated from the owner’s home a nominal weekly amount is normally claimed for use of home as office and store.
Telephone costs both for mobile and landlines and including broadband and dial-up internet costs are all allowable. Home telephone costs are allowable but in the case of sole traders and partnerships, a private percentage is normally disallowed.
Repairs and renewals to the business’s assets or customers property are fully deductible.
Printing postage stationery and advertising costs when incurred for the business are allowable for tax purposes.
Professional fees such as your accountant can be claimed as can legal fees in respect of things like recovering bad debts or contract preparation. Where professional fees are incurred in respect of capital items such as preparing long leases over 50 years or buying or selling property are not allowable against the business’s income.
Surprisingly entertaining costs whether for staff or customers are not allowable at all.
Travel and subsistence while carrying out business matters are allowable so long as it is reasonable. Senior staff would be allowed to stay in good quality hotels and have dinner breakfast and lunch in good quality establishments due to their position.
Allowable motor expenses include fuel, insurance, road tax, repairs and maintenance, roadside recovery costs and cleaning, but not fines for motoring offences. The capital cost of providing the vehicles is dealt with below in the section entitled capital costs. In the case of a sole trader or partnership, a proportion of the costs are disallowed for the partners to represent the private proportion. However, where employees are provided with a company car they will be taxed on the benefit1
Protective clothing is fully allowed able but other clothing which offers no protection is not.
Bank Charges are fully allowable and bank and other interest incurred is allowable in almost all cases.
Subscriptions to professional and trade associations are normally allowable.
Laundry costs in respect of protective clothing are allowable and this can be estimated if necessary.
Gifts for customers are allowable in some restricted cases and cannot consist of food, alcohol or tobacco and must include the business’s name.
Electricity and gas costs are fully allowable in respect of the business premises.
Literature that helps the business trade such as magazines and books used to guide or understand the industry is fully allowable.
Equipment hire is a valid claim against profits of the business where the equipment is used in running it.
Cleaning costs for the premises are allowable in all cases.
Relief is always givens for the provision of specific bad debts.
Training costs for staff inappropriate areas may be deducted.
Canteen and refreshment costs are valid deductions from profits.
Some items of expenditure give a business a benefit over a period of years. For example, a personal computer. HMRC do not allow all of the expenditure to be claimed against the profits for the year the item was purchased. Instead, a percentage is allowed each year. There are certain temporary rules in place from time to time that does allow a full deduction in the year the asset is acquired.