By Jonathan Amponsah CTA FCCA, The Tax Guys
There’s a general rule which says you can claim all expenses incurred wholly and exclusively for the purpose of your business sounds. This sounds manageable but as with many aspects of tax the reality is more complicated.
Let’s look at some examples you may be surprised to discover you can’t tax deduct, even where you’ve incurred the expenses for your business.
- Employing Family Members
Employing your spouse and kids can work well. However, where you pay family members above the market rate, where they don’t actually perform any task for the business or where you’ve structured this working arrangement incorrectly with no evidence or paperwork to back up your plan, HMRC will not allow their salaries to be put through the business. Take care as this is currently a hot spot for HMRC enquiries.
- Parking Fines
Your business is delivering some items to a customer. The driver parks for a few minutes and get a parking ticket. Surely the reason for the fine is because of business activity so it should fall under the wholly and exclusive for the purpose of business rule? Not quite. Fines incurred for breaking the rules are disallowed.
- Promotional Gifts
It’s true that nothing ever happens in business until a product or a service is promoted and sold. However, if you promote your business by spending too much money on promotional gifts and the gifts cost more than £50 per customer, you won’t be able to deduct these costs against income. Even where the gift cost £50 or less, make sure it carries a conspicuous advert for your business.4
Let’s imagine that you’re self-employed or sole trader (rather than limited company), with a home-based office. You visit clients regularly with your journey starting from your home- office and includes a few trips from one client to another client. Can you claim the full travel expenses? The rules deem the travel from your home office to clients as ordinary commuting and therefore not tax deductible.
- Client Entertainment
With the purpose of negotiating and generating new business you decide to take clients to a restaurant. Unfortunately, the rules specifically disallow these expenses to be claimed against tax. Part of the reason behind this is that you could have had the same conversation over a cup of tea in the office, plus there is an element of personal benefit in the entertainment.
- Clothes for Work
Can a barrister claim the cost of the gown worn in court against tax? Not according to the famous tax case of Mallalieu v Drummond. This established that “no deduction is available from trading profits for the costs of clothing which forms part of an ‘everyday’ wardrobe. This remains so even where the taxpayer can show that they only wear such clothing in the course of their profession.”
However, some protective and work clothing with logos and other business branding are claimable. If in doubt, speak with a tax accountant.
- Staff Reward via Trust
You want to reward your staff and decide to make payment into a Trust to demonstrate that the money is ready to be paid out when they hit their targets.
As the money has been paid from your bank account to the Trust, can you claim it as a legitimate business or staff expenses? No, because of a specific tax avoidance rule means this legitimate expense cannot be claimed.
- Making Donations
Donations made to political parties and non-registered organisations outside of the Gift Aid regime cannot be claimed against tax. This is to stop businesses offsetting costs through privately owned ‘non-profit’ organisations.
- HMRC Penalties
Penalties imposed by HMRC and other government departments are not tax deductible. So, avoid those penalties and get your accounts and tax returns done on time.
- Legal Fees
Although legal advice adds value to your business and may save you from making costly business mistakes, not all legal costs are tax deductible. For example, fees in connection with purchasing business premises or investing in shares are disallowed.
Also, fees with both personal and business elements may fail the wholly and exclusive test. Unsurprisingly legal costs associated with breaking the law are disallowed. For example, if you ask your lawyer to defend the case for a parking fine and you lose, you won’t be able to claim the legal fees.
ABOUT THE AUTHOR
Jonathan Amponsah CTA FCCA is an award-winning chartered tax adviser and accountant who has advises business owners on entrepreneurial tax reliefs. Jonathan is the founder and CEO of The Tax Guys. www.thetaxguys.co.uk