Avoid UK Tax Problems By Knowing What Business Expenses Are Disallowed

Not all expenses can be claimed as valid business expenses for tax purposes. In a number of areas there is a grey area when an expense could be a business or private expense or may be a business expense used for private purposes. Tax problems can be avoided by understanding which expenses are allowed for tax purposes and which are not allowed.

The costs of goods, materials or services purchased by a business which are for private use are not allowable for tax purposes. The disallowed element also applies to goods and materials bought for business use which are subsequently used for private use.

Payments made by the business for none business work are not allowed.

A limited company can claim the wages and salaries of directors as a valid business expense. If the business is self employed then the proprietors own wages and drawings are not allowable as business expenses as such costs are distributions of the net taxable profit and not deductions from it. Also included in this category of disallowed expenses relating to the proprietor wages would be national insurance contributions, income tax payments and pension contributions

Pension contributions are an allowable personal expense which the small business owner would claim as tax deductible from the overall tax burden but not in the self employment accounts.

Motoring costs are a specifically defined area of non business expenses. Private use of the vehicle which may be used for business purposes is not allowed for tax purposes. Also disallowed are motoring fines including parking fines, any legal costs involved. The capital cost of buying private vehicles is not an allowable expense and also disallowable are travel costs from home to place of work and meals not associated with business travel.

The cost of any non business premises or non business part of the premises is disallowed for tax claims. The capital purchase price of premises is not allowed as a tax deduction as such purchases are treated as capital assets and subject to the tax rules applying to fixed assets.

Repairs of non business parts and equipment are not allowed as claims against tax liabilities. Costs of improving or altering premises or equipment are not allowed as tax deductions as these costs are added to the fixed asset costs and claimable under the capital allowance rules.

Non business use including private use of telephones, faxes and computer equipment and other hardware items are disallowed fore tax purposes.

Entertainment expenses of clients and suppliers are not allowed for tax purposes. Also disallowed are expenses incurred for meals of non employees who accompany the business owner on business trips unless that person has a valid business reason for being on the trip. Hospitality is generally not an allowable expense although entertainment of employees at Christmas or special events is allowed within restricted financial limits.

The capital element when repaying loans, overdrafts or other financial arrangements are not allowed as business expenses as these items are balance sheet items and not profit and loss items, the profit and loss being the calculation of the net taxable profit.

Bad debts represent an area where specific rules apply. Specific identified bad debts are allowed for tax purposes but general bad debts where a percentage is applied to the sales value as likely to become bad debts is not allowed as a tax deduction. Debts which have not been included in sales turnover are not allowed as such debts have not been accounted for and also bad debts on fixed assets are not allowed as the loss is accounted for in the capital allowances calculations.

Legal costs of buying property or equipment are not allowed for tax purposes as such costs are treated as capital expenditure and included in the purchase price of the asset and subject to capital allowance rules for reclaiming allowances over the life of the asset. Costs of settling tax disputes are not allowable and also fines imposed upon the company bare not allowable tax expenses.

Depreciation of fixed assets is a management decision and not allowable for tax purposes. If depreciation is deducted from the management accounts to report the net profit for tax purposes the depreciation is then added back as the allowable tax claim is the capital allowance applicable to those capital fixed assets. Same with profits and losses on the sale of fixed assets which are accounted for under capital allowances.

Specific work uniforms and clothing is allowable whereas ordinary clothing albeit suitable for the work being carried out is not allowable.

Small self employed business may not claim donations to clubs, charities, associations or political parties are not allowed for tax purposes. Subscriptions to trade associations which could be connected to the business objectives would be allowable as being for business purposes.

About the author: Terry Cartwright is a qualified accountant in the UK designs Accounting Software on excel spreadsheets providing complete Small Business Accounting Software solutions for with single and double entry Bookkeeping solutions for limited companies and self employed business