What Can I Claim Through My Business? A Comprehensive Guide for UK Limited Companies – Friday Financial Freedom Finder Newsletter #021

What can I claim

Running a successful business in the UK means navigating the complexities of allowable expenses. It's essential that small business owners understand the nuances of tax relief to ensure they're neither missing out on deductible expenses nor falling foul of UK tax legislation. This guide provides an in-depth exploration of the various realms of business expenses.

The "Wholly and Exclusively" Principle

A central tenet of UK tax law is the "wholly and exclusively" rule. It's a principle that frequently comes into play when assessing the validity of business expenses. Simply put, for an expense to be allowable as a tax deduction for a business, it must be incurred wholly and exclusively for business purposes.

But what does this mean in practice? Let's delve deeper.

Understanding the Rule: The rule's essence is straightforward. If you're spending money with the sole intent of benefiting your business, then the expense can typically be claimed against your taxable profits. For instance, if you purchase a software license that is strictly used for managing client information or accounts, it's evident that the software is wholly and exclusively for the business.

The Grey Areas: Problems arise when there's dual purpose behind an expense — where both personal and business benefits are derived. For example, suppose you bought a magazine subscription. Some issues may contain articles related to your business, but others might be for personal enjoyment. Because the expense isn't exclusively for the business, it becomes challenging to claim it as a deductible expense. However, where possible and appropriate, apportionment might be applied, allowing a partial claim reflecting the business use.

Proving the Intent: One of the challenges with the "wholly and exclusively" rule is proving intent. Say you attend a seminar. On the surface, it's a business expense. However, if the seminar is in a luxury resort and there are ample leisure activities involved, HMRC might query the genuineness of the claim. Being able to demonstrate the primary business purpose, perhaps through seminar materials, agendas, or correspondence, becomes crucial.

Precautionary Measures: Due to the rule's subjectivity, it's essential to maintain meticulous records. Keeping clear documentation not only simplifies the process at the year-end but also stands you in good stead should HMRC ever raise inquiries.

Avoiding Pitfalls: A frequent misconception among business owners is assuming that if an expense aids the business, it's automatically allowable. However, the rule doesn't hinge on "necessity" or "benefit" but on the purpose of the expense. Just because an expense is beneficial doesn't mean it's exclusively for business. For instance, elegant clothing might be beneficial for a business meeting, but since it can be worn elsewhere, it isn't considered exclusively for the business.

Let's look into some specifics

Vehicles: To Lease or To Purchase?

One of the first decisions many businesses face is whether to lease or purchase a vehicle. When you opt to lease a car through your business, the associated lease costs can be set against profits, potentially reducing your corporation tax bill. However, bear in mind that if the car is used for both business and personal purposes, only a portion of the VAT can be reclaimed.

On the flip side, purchasing a vehicle means it becomes an asset of the company. While you can't claim the full cost immediately, you can claim the vehicle's depreciation each year. However, luxury cars have caps to the amounts that can be claimed. For vehicles used strictly for business, reclaiming the entire VAT becomes feasible, but for those used personally, no VAT can be claimed. Weighing the priorities of cash flow, ownership, and flexibility is key when making this decision.

The Mileage vs. Fuel Debate

Driving for business purposes poses another question: should one claim mileage or fuel? For small business owners utilising their personal vehicles for business activities, claiming mileage might be the simplest route. HMRC sets the rates, which encompass all vehicle costs, ensuring business owners aren't out of pocket.

However, if your company has provided you with a car, the situation gets a tad more complex. In such cases, you can reclaim the VAT on fuel as long as it's used strictly for business operations. Any personal use needs either to be repaid or will be treated as a benefit in kind, which can have its own tax implications. See more here

Your Home, Your Workspace

In today's increasingly digital world, many business owners find their home doubling up as an office. Should you find yourself in this position, you're in luck. A proportion of household expenses, from rent to utilities, can be claimed based on the number of rooms and the amount of time dedicated to work activities.

There are 2 ways to calcuate the use of home as office charge. The standard approach and the simplified approach

A Standard Approach

Claiming a Proportion of Household Expenses for Use of Home as Office

If you're a business owner operating out of your home, you may be able to claim a proportion of your household expenses as business costs. This is particularly beneficial when the £6 weekly flat rate doesn't adequately cover the actual expenses of running a business from home.

How it Works:

  1. Determine the Business Proportion: To accurately claim these expenses, you need to work out the proportion of your home that's used for business. This can be calculated based on the number of rooms used for business in relation to the total rooms in the house, or the floor area used for business compared to the home's total floor area.

  2. Determine the Time Proportion: Once you've identified the business portion of your home, consider how often you use this space for work. If a room is used half for business and half for personal purposes, you can only claim expenses for the time it's used for business.

An Example Calculation:

Let's say your home has five rooms, and one of them is used exclusively as an office. If your monthly electricity bill is £100, you can claim 20% (1/5) of this cost as a business expense, which amounts to £20. If you only use this office 50% of the time for business purposes, you should then halve the £20, resulting in a £10 claim for that month.

Expenses That Can Be Claimed:

  • Mortgage interest (not the capital repayment - but note the pitfalls listed below)

  • Rent (but be careful - this might be against your rent agreement)

  • Utilities like gas, electricity, and water

  • Internet and telephone usage

  • Repairs and maintenance (proportional to the business's use)

Expenses That Cannot Be Claimed:

  • Council tax

  • Television licence

  • Repairs or maintenance that are not related to the business area

Pitfalls of Including Mortgage Costs:

While you can claim a proportion of the interest on your mortgage payment, claiming a portion of the capital repayment can lead to complications. If you claim the capital repayment, HMRC might consider that part of your home as a 'business premises', which could potentially make a portion of any gain on the sale of your home subject to Capital Gains Tax (CGT).

Business Rates Implications:

If you use a part of your home exclusively for business and it has been adapted for this purpose (e.g., a workshop in your garage), there's a risk that this portion might be subject to business rates rather than council tax. Business rates are the non-domestic equivalent of council tax and can be more expensive. It's crucial to ensure that any area claimed for business use is also used for some domestic purposes to avoid these rates. If you're unsure, it's always best to seek guidance from the local council's valuation office.

A Simplified Approach:

The UK's HMRC recognises that working from home brings about additional costs – think of the heating, lighting, and electricity used by your computer. Rather than having business owners tediously calculate the exact amount of these costs, HMRC offers a simplified method: you can claim a flat rate of £6 per week without having to keep any detailed records of the specific costs you've incurred.

How It Works: If you're a director of a limited company and you work from home, you can charge your company a rental charge of up to £6 per week without having to provide any evidence of the costs you've incurred. This can be a hassle-free way to get some compensation for the additional costs you bear for working from home, without the headache of detailed record-keeping or complex calculations.

When to Consider a Detailed Claim: However, if you believe that your actual costs of working from home exceed the £6 weekly allowance, you can choose to calculate and claim a higher amount. In this scenario, you'd need to apportion the costs of your utilities and other relevant bills based on the space you use for work and how often you use it. It's a more involved process and requires diligent record-keeping, but it could result in a higher claim.

Limitations and Precautions: It's essential to remember that the £6 per week allowance is designed for those who use a part of their home for work. If you have a room dedicated solely to your business, there might be implications for Capital Gains Tax when you sell your house. It's always wise to seek advice if you're unsure.

Navigating Business and Personal Expenses

Often, to keep the business afloat or due to sheer convenience, business owners might cover certain costs out of their own pockets. These costs aren't lost; they can be claimed back from the company. Such transactions need to be meticulously recorded in the Director's Loan Account (DLA). An overdrawn DLA can come with its tax complications, so regular checks and balances are crucial.

The Director's Loan Account (DLA) is a fundamental concept for directors of limited companies in the UK. It's essentially a virtual account that tracks money moving between the company and the director that doesn’t fall under salary, dividends, or reimbursable expenses. One of the common scenarios where DLAs come into play is when a business owner pays for company expenses from their own pocket.

How It Works:

When a director personally pays for a legitimate business expense, this payment can be considered as the director lending money to the company. This amount can be recorded in the DLA. Later, the company can 'repay' the director from its funds, clearing the 'debt' on the DLA, without this repayment being considered a taxable benefit for the director.

An Example:

Imagine a director named Sarah. Her company needs a new computer, which costs £1,000. She decides to purchase the computer using her personal credit card. When she does this:

  1. Recording the Transaction: The £1,000 is recorded as a debit in the company’s books, indicating the company owes Sarah. The DLA will show the company is 'in debt' to Sarah for this amount.

  2. Repaying the Director: At a later date, when the company's cash flow situation is better, the company can repay Sarah the £1,000. This is recorded as a credit in the DLA, offsetting the original debit, and balancing the account.

  3. No Tax Implications for Repayment: Since the company is merely repaying Sarah for a legitimate business expense, there are no tax implications for this repayment. It's not considered as income for Sarah nor is it a deductible expense for the company (since the original expense of the computer was the deductible part).

Points to Remember:

  1. Maintain Proper Documentation: It’s crucial to keep detailed records and receipts of all transactions related to the DLA. This is to prove the legitimacy of the transactions in case of an HMRC investigation.

  2. Overdrawn DLA: If the DLA is overdrawn at the company’s year-end (meaning the company owes the director), there can be tax implications if it isn't repaid within nine months and one day after the company’s year-end.

  3. Tax Implications for the Company: If the DLA isn’t repaid within the stipulated time, the company might have to pay a Section 455 tax at 32.5% (as of my last update in January 2022) on the outstanding loan amount. This can be reclaimed, but not until nine months and one day after the end of the tax year in which the loan is repaid.

  4. Benefit-in-Kind: If the director owes the company money (the DLA is in credit), and this isn’t repaid within a certain time frame, it might be considered a benefit-in-kind. This could have personal tax implications for the director and National Insurance implications for the company.

Entertainment – Who's On the Guest List?

Entertaining is a nuanced category.

In the business world, forging and nurturing relationships often happens outside the office – over a meal, a drink, or even a round of golf. But when the bill arrives, can these costs be claimed back against your company’s tax? It’s a common question for many UK business owners, and the answer, unsurprisingly, is a bit complicated.

Client Entertainment: A Necessary Business Practice

We've all been there. A potential client or a current one has flown into town, and as the host, you feel the need to ensure they are treated well. This might involve dinner at a nice restaurant, tickets to a local event, or other types of entertainment. From a business perspective, these gestures are invaluable – they can help in sealing a deal or strengthening an ongoing partnership.

However, from a tax perspective, HMRC sees things differently.

Why Client Entertainment Isn't Tax Deductible:

The primary reason is rooted in the idea of personal benefit. HMRC argues that when you entertain a client, there's an inherent personal benefit involved. In other words, you enjoy the meal or event too. Hence, they don't consider these costs as being 'wholly and exclusively' for the purposes of the trade, which is a guiding principle in determining tax-deductible expenses.

That said, while these costs aren't allowable for Corporation Tax purposes, you can still reclaim the VAT on the expenses, but only if:

  1. You aren't also in attendance (a rarity in client meetings).

  2. The entertainment is provided only to a sole proprietor, partner, or director of another business.

In practice, this means VAT reclaims on client entertaining are infrequent.

Staff Entertainment: Where HMRC Softens Its Stance

Entertaining staff, in contrast, has clearer and more favourable tax implications. Why? Because staff motivation and morale, in the eyes of HMRC, have a direct bearing on business success.

Annual Staff Events:

The most notable example here is the annual Christmas party (or a similar annual event). These gatherings are tax-free provided they meet certain criteria:

  1. Open to All: The event must be open to all employees. This doesn't mean everyone has to attend, but everyone should have the option.

  2. Cost Cap: The cost per attendee must not exceed £150. It's crucial to note this is an annual total, so if there are multiple events in a year, their combined cost per attendee must not surpass this limit.

  3. Exclusivity: The exemption only covers employees and their partners. If clients or non-employees are invited, their costs won't fall under this tax-free umbrella.

Other Types of Staff Entertainment:

Aside from annual events, team-building exercises, away-days, and staff outings can also potentially qualify for tax relief, provided they aren’t merely disguised holidays or simply for the director’s benefit. As always, the litmus test is whether the expense is 'wholly and exclusively' for the benefit of the trade.

Dress for Success, But Know the Rules

In the world of business, first impressions matter, and the way we present ourselves can often speak volumes before a single word is uttered. Whether you're delivering a keynote presentation, meeting a potential client, or simply heading to the office, your attire plays a pivotal role in shaping perceptions. But when it comes to tax deductions, can you claim your professional wardrobe as an expense? Let's delve deeper into the intricacies of tax rules surrounding clothing for business purposes.

The Core Principle: Functionality Over Form

At the heart of HMRC's approach to clothing expenses lies a clear distinction between functionality and form. If clothing is essential for the performance of a job and offers protection or a distinct identity, it's likely to be tax-deductible. If it merely enhances your professional appearance, it's probably not.

Protective Clothing

This category is rather straightforward. If your job necessitates you to wear protective gear – be it a helmet on a construction site, safety boots in a factory, or gloves in a laboratory – these items are fully deductible. The reason? They're vital for the safe execution of your job and aren't typically worn outside of that context.

Branded Clothing

Uniforms or attire showcasing a prominent company logo fall under this bracket. Since these items are often worn to promote a brand or signify an employee's association with a company, HMRC sees them as 'wholly and exclusively' for business purposes. So, that t-shirt with a large company logo or the apron bearing the restaurant's emblem? Those are tax-deductible.

However, subtlety can be a pitfall here. A small, inconspicuous logo might not make the cut, so always ensure the branding is overt and clearly associated with the business.

The Suit Saga: A Case Study in Clothing Deductions

A landmark case that's often cited when discussing clothing deductions involves a barrister who tried to claim his suits as tax-deductible. His argument? The suits were essential for his professional appearance in court. However, HMRC didn't buy this argument, contending that the suits could also be worn outside of a professional context, hence failing the 'wholly and exclusively' test for business purposes.

The verdict? The barrister's claim was dismissed, cementing the stance that everyday attire, regardless of its significance in a professional setting, doesn't qualify for tax relief.

Navigating the Wardrobe of Tax Rules

While it might be tempting to view your entire professional wardrobe as a business expense, it's crucial to differentiate between what's essential for your job and what enhances your professional image. The former, if it meets the stringent criteria set out by HMRC, can offer tax relief. The latter, no matter how expensive or crucial for that business meeting, remains a personal expense in the eyes of the taxman.

Modern Marketing and The YouTube Era: Navigating the Tax Maze of Aesthetic Expenses

In today's digital age, traditional marketing methods have taken a backseat as influencers and content creators on platforms like YouTube pioneer a fresh marketing frontier. With millions of viewers tuning in, personal branding is at the forefront. This has raised new questions about what constitutes a valid business expense, especially when it comes to personal aesthetics like makeup, hair, and clothing.

The Principle of Exclusivity: Diving Deeper into ‘Wholly and Exclusively’

UK tax laws revolve around the principle that an expense can be claimed if it is incurred 'wholly and exclusively' for business purposes. It's this very principle that becomes a minefield when dealing with aesthetic expenses for video content creation.

Makeup and Hair Styling

For a YouTuber, looking the part is integral. They may argue that the high-end makeup or specific hairstyle is a necessity for the production quality of their content. And while it's true that these expenses can be tied directly to video production, the challenge lies in the 'exclusive' usage for business. If, for instance, the YouTuber films a video in the morning, but wears the same makeup or hairstyle for a night out, there's a duality of purpose. This dual use – both personal and business – can make it challenging to claim the expense as wholly for business.

Specific Attire

Similar to makeup and hair, attire can be a contentious issue. If a content creator buys a specific outfit for a video shoot, it can be seen as a business expense. However, if the outfit is worn again in a non-business context, it fails the exclusivity test.

Treading Carefully: Avoiding the Duality Pitfall

For expenses to be successfully claimed, the individual would have to demonstrate that the costs incurred – be it for makeup, hair, or clothing – were solely for the production of content and not used outside of this context. In practical terms, this might mean applying makeup solely for filming and removing it immediately after, or wearing a specific outfit only for the duration of the shoot and not for personal outings. But, as one can imagine, this rigorous separation is hard to maintain, making it a frequent point of contention with HMRC.

Furthermore, if a YouTuber or influencer tries to argue that a specific look is integral to their brand and, thus, a business necessity, they would still need to ensure no personal benefit is derived from these expenses. This strict delineation is where many claims fall short.

Seeking Clarity Amidst Ambiguity

Given the nebulous nature of these expenses, it's crucial for influencers and content creators to keep meticulous records. Documenting the explicit business purpose of each expense, perhaps even alongside the content created, can provide a clearer justification.

However, the best advice remains to consult with a tax professional familiar with the nuances of digital marketing expenses. They can offer guidance tailored to individual circumstances, ensuring that content creators can focus on what they do best, without tax-related hiccups down the line.

In conclusion, while the YouTube era has transformed the landscape of marketing, it's brought along its own set of tax challenges. By understanding the nuances of 'wholly and exclusively' and avoiding the pitfalls of duality, influencers can navigate this terrain with greater confidence.

Subscriptions with a Dual Purpose

In our fast-evolving digital age, subscription services have become an integral part of our daily lives. From listening to the latest audiobooks on Audible to streaming music for a project on Spotify, these services offer convenience at our fingertips. However, when it comes to accounting for such expenses in a business context, the lines between personal and professional use can often blur. The challenge lies in discerning when and how these subscriptions can be claimed as business expenses.

Business or Pleasure? The Crux of Dual-Purpose Subscriptions

At face value, it may seem straightforward. If a subscription is used for business, it's a business expense. But delve a little deeper and complexities arise. Let's say a business owner subscribes to Audible, sourcing audiobooks related to their field for professional development. On the surface, this appears wholly business-related. But what happens when the same subscription is also used to download the latest bestselling fiction for personal enjoyment during a weekend getaway?

Similarly, a graphic designer might use Spotify to find the perfect track for a client's advert. However, that very subscription might power the tunes for their evening workout session.

HMRC and the Principle of ‘Wholly and Exclusively’

HMRC's guidance on what can be claimed as an allowable expense is underpinned by the principle that the expense should be incurred "wholly and exclusively" for business purposes. This principle becomes a touchpoint when considering dual-purpose subscriptions.

With services like Audible or Spotify, where personal enjoyment can seamlessly interweave with business use, proving that a subscription is "wholly and exclusively" for business becomes a challenge. It's this intertwined usage that often complicates the tax treatment of such expenses.

Striking a Balance: Prorating Your Subscriptions

A practical approach to handling dual-purpose subscriptions is proration. By this method, a business owner can claim a proportion of the subscription cost that correlates directly with its business use.

For instance, if 70% of the audiobooks sourced on Audible over a year relate directly to business, then 70% of the annual subscription cost can be earmarked as a business expense. The remaining 30%, attributed to personal use, would then be excluded.

It's essential, however, to maintain detailed records that justify the proportion claimed. Regularly reviewing and updating this proportion, based on actual usage, can provide a robust foundation should HMRC inquire about the nature of these expenses.

Ring, Ring – It’s Business on the Line

In today’s digital age, the mobile phone has evolved from a mere communication tool to an essential business apparatus. From checking emails and coordinating with teams to conducting virtual meetings and even sealing deals, our phones serve as versatile extensions of our professional lives. But when it comes to accounting for mobile phone costs in business, how does one ensure compliance with UK tax regulations? Let's delve deeper into the nuances of claiming mobile phone expenses.

Company Contract vs. Personal Contract: The Tax Implications

Understanding the difference between company and personal phone contracts is pivotal when categorising mobile phone expenses.

Company Contracts: When a mobile phone contract is directly under the company's name, the situation is relatively straightforward. The full cost of the contract, including line rentals, call charges, and even the handset's cost, can be claimed as a legitimate business expense. This is because the contract's primary intention is deemed to be for business purposes. However, it's essential to ensure that any significant personal use does not attract a benefit-in-kind charge.

Personal Contracts: Here's where things get a tad more intricate. If a business owner or an employee has a personal mobile phone contract but uses the phone occasionally for business-related calls or activities, only a portion of the bill, reflecting the business usage, can be expensed. This means you can't claim the entire bill as a business expense. Instead, an estimation, or better yet, a detailed breakdown of business vs personal usage, should be calculated each month.

Documenting and Proving Business Use

Whether you're on a company or personal contract, maintaining a log of business-related calls and data usage is crucial. Modern smartphones and service providers often provide detailed call logs and data usage breakdowns that can help substantiate your claims. Regularly reviewing these records and storing them efficiently can stand you in good stead if HMRC ever wishes to examine the nature of your claims.

Potential Pitfalls and Pro Tips

  • Benefit-in-Kind (BIK): Even if the company contract covers the mobile phone expenses, business owners should be wary of the Benefit-in-Kind implications. HMRC views significant personal use on a company contract as a benefit, which could be taxable. However, as of recent regulations, one mobile phone provided to an employee is generally exempt from BIK, as long as it's primarily for work use.

  • VAT Recovery: If the company is VAT registered, it's possible to reclaim the VAT on the business proportion of the mobile bill. For company contracts, VAT can be recovered on the entire bill unless there's significant personal use. For personal contracts, VAT can only be reclaimed on the business-use 

In Conclusion

The labyrinth of allowable expenses might seem daunting, but with diligent record-keeping and an understanding of the guidelines, it becomes manageable. Always remember, when in doubt, consulting with a tax expert can provide clarity.

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About the Author

Annette Ferguson 

Owner of Annette & Co. - Chartered Accountants & Certified Profit First Professionals. Helping online service-based entrepreneurs find clarity in their numbers, increase wealth and have more money in their pockets.