What expenses can I claim?
Probably the most frequently asked question by those starting in business and those already trading is “what can I claim as business expenses?”
Simply put Inland Revenue offer a simplistic overview of what can be claimed as expenses in this video but, in my opinion, this doesn’t quite go far enough. In response to simplistic advice we often hear people saying things like:-
• Bob puts through his wife’s petrol on his business card so he gets a bigger claim against the taxman, or
• Tony is in business so he can claim all his lunches and bar expenses now, or
• Sally put her family holiday through the company books because her husband, Stan, had a meeting whilst they were overseas.
Let’s start by accepting that none of the above are correct and should Inland Revenue find out then the taxpayer will:-
• Have to pay the tax,
• Have to pay large penalties,
• Incur lots of legal and accountants fees unravelling the sorry situation, and
• Likely be scrutinised by Inland Revenue for future years too.
Not only would this be an embarrassing, costly and painful exercise it is also quite unethical. If we like to live in this nice country and enjoy the public services, roads, hospitals and schools then we all have to pay our share.
The trick is to know what your share is and mitigate your taxes to the lowest allowable level over time. That is where we, as Chartered Accountants and tax advisers, come in.
A bit more complexity
We shall not get overly complex in this blog and you should note that there are various circumstances where the rules are altered to some degree.
However, the basic principle of claiming business expenses (deductions) is laid down in what we term the General Permission:-
A person in business is allowed to deduct expenses (including depreciation) to the extent that these costs have been:-
• incurred in deriving income, or
• incurred by them in the course of business which has a purpose of deriving income.
Connection to, or nexus with, business
So, if you are in business and you’re seeking to earn income then you can claim expenses which you have had to pay in order to continue in business and earn more money.
For example, Bob has a catering business and makes deliveries of fresh food to clients. He uses the company van for these deliveries which requires him to incur the cost of petrol to fuel these trips. These fuel costs have been incurred for the business purpose of earning income and so he can claim these fuel costs as a business expense.
However, Bob’s wife does not work in the business nor is her car used for business purposes. There is no link between the catering business or the catering income and his wife’s petrol expenses. Therefore, he cannot claim these as business expenses.
To the extent
One of the key terms within the general permission which seems to confuse the most is “to the extent”. This aspect comes into play when the expenses have both a business and private element and seeks to remove the private element from the claim.
So, Sally and Stan claimed the full cost of their overseas holiday because Stan had a business meeting whilst they were there. No doubt the overseas trip has a connection to business and income but clearly claiming the full cost is unfair as the business aspect is only a small portion of the holiday. There is an obvious personal and private element to the holiday too.
What Sally should have done here is determine a fair and reasonable apportionment of the cost so that the business only claims to the extent that the expense was business related. In such a scenario we may consider the number of normal business days being a relevant basis and then apportion Stan’s costs according to the number of working days. Say he had two days of meetings whilst the whole holiday covered 10 working days. Then Sally should only have claimed a fifth of Stan’s travel and accommodation costs. It goes without saying that if Sally is not on business but rather just along for the holiday then none of her costs will be claimable.
Coming up soon we’ll have more specific posts on expense claims – we’d love to hear from you if there’s anything in particular you’re interested in,