Claiming expenses the right way

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In the final part of her posts on setting up your own business AAT member, Lucy Cohen of Mazuma, guides you through the maze of claiming expenses.

What can I claim for?

Ah, the age old question of whether something is tax deductible or not.  This can be a real headache for new business owners and the answers can be limitless.  My first advice would be that if you are not sure, check with your accountant or HMRC first.  There are a few general rules that can be followed which should keep you in line with the rules.

Expenses to claim

  • The cost of any goods or services you use fully for your business can be deducted from your sales revenue for tax purposes. Where an item is used partially for your business and partly for private purposes, such as your private car or home, you can claim the business proportion of the costs against your business profits. However, you must be able to justify the business proportion with evidence such as the miles driven, or space used by the business, so once again, keep on top of your record keeping.
  • Capital allowances. If you purchase an item that is expected to last several years, such as a van, you can claim a special deduction known as a capital allowance. The first £25,000 you spend on equipment each year qualifies for 100% capital allowances in the year of purchase. This does not include cars though.
  • Loan interest. If you take out a business loan the interest paid on that loan can be deducted from your sales revenue. The loan must be taken out to fund your business, rather than a personal loan or credit card borrowings.

Expenses not to claim

Anything that you don’t use in the business – that should be fairly obvious.

Entertaining costs – unfortunately taking clients out for drinks is not a valid business expense. There are rules that allow for staff entertainment costs, but obviously you have to have staff, taking yourself out for drinks and calling it a staff party just doesn’t cut it with the Taxman.

Many people think that buying a box at a sporting event under the business name would automatically be regarded as advertising, rather than entertaining but this isn’t the case. To promote your business through having a box at a football club, sponsoring a car rally, you need to show a true attempt to benefit the business in order for it to be tax deductible.

Lucy’s first post in this series concentrated on the tax hurdles you face when starting a business, while her second post offered tips for becoming a sole trader.

You can follow Lucy on Twitter.

Lucy Cohen is the co-founder of Mazuma Accountants.

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