Introduction:
As a small business owner it is sometimes difficult to know when an expense incurred doing business is tax deductible. The rules in the UK are complicated and there is not always a clear-cut answer.
Those of us who own small businesses have many issues to worry about not least the issue of tax liabilities and connected with that the whole issue of expenses. Just what is a justifiable business expense? And if you work from home, as so many small business owners now do, then where do household expenses become business expenses? How do you know when a line has been crossed either way? It is important to understand this area particularly if you have just started up a new business or if your small business has grown rapidly and you now need some good business advice to help you along the road to success.
One important factor to consider is your own personal lifestyle. For instance if you live in a large house with a large, separate office then what would be considered reasonable utilities costs for that space may be as high as the total utilities bill for a one-bedroom apartment. So someone else working out of a one-bedroom apartment would not be expected to claim the same amount as this would constitute theirtotal household utilities bills. Company expenses, therefore, have to be for services of the same level that you would normally have in your personal life. If you live in a luxurious home then it would be reasonable for your home office to be furnished to a similar level of quality but to expensively furnish a spare bedroom used as an office in a 2-bedroom terraced house could be seen as extravagant.
Another important factor when assessing the acceptability of expensesis when it comes to entertaining clients or potential clients. If you run a consultancy business where regular face-to-face meetings are required with clients who expect to be entertained with lunch,this does not mean that the cost of the lunch would be an acceptable expense (in the tax man’s eyes, at least). If your client is an executive of a large company used to lunching at Michelin starred restaurants then such a venue would be deemed appropriate as part of the process of securing or retaining that client, but is not a tax-deductible expense for a business (although it might once have been).Expenses are only for those things related to a business need.
When expenses relate to gifts to clients thenthey will only be viewed as an acceptable business expense if they are of a relatively small value, generally less than £250. Gifts to employees are generally taxable so if you reward your high-flying sales executiveswith a luxurious Caribbean holiday then you should make them aware that this gift is liable to tax.
The type of business also plays a part in determining what is seen as a normal level of remunerationfor certain sectors. Something that would seem extravagant in the IT sector might be very typical in, for instance, investment banking.
So in answer to the question “When is an Expense not an Expense?” for tax purposes, at least, there really is no straightforward answer – it depends very much on the types of business you are in and the cost of a particular expense and, when it comes to working from home, it depends on your own personal lifestyle.