What Are Allowable Business Expenses for Tax Purposes?

As a business owner in the UK, you likely incur many different expenses related to running your company. The good news is that many of these expenses are allowable for tax purposes, meaning you can deduct them from your taxable income and lower your overall tax bill. But what exactly counts as an allowable expense? This guide breaks it down.

Understanding Tax-Deductible Business Expenses

The basic rule around allowable expenses is this: If a cost is essential for carrying out your business operations, you can likely deduct it. These write-offs are referred to as tax-deductible expenses.

Some common examples include:

• Office expenses like phone/internet bills
• Business travel costs
• Staff salaries
• Inventory and materials
• Marketing and advertising
• Premises expenses like rent and utilities

Later, we’ll dive into some of the most frequently deducted expenses for small businesses. First, let’s look at what does NOT qualify.

What Isn’t Deductible?

While the list of potentially deductible expenses is long, some types of costs are specifically excluded by HMRC:

Fines and Legal Fees

Costs that result from breaking laws or regulations cannot be deducted. This includes parking tickets, penalties, legal expenses for criminal defense cases, and more.

Personal Expenses

Expenses for your own private use are not deductible. For example, travel between your home and office, personal health insurance premiums, childcare costs, etc. Some exceptions apply if you work from home.

Gifts and Entertainment

In most cases, you cannot deduct costs for gifts, entertainment, restaurant meals or holiday parties – even if they are for clients or partners. But employee entertainment can be deducted.

Depreciation 

The decrease in an asset’s value over time cannot be deducted as an expense outright. Instead, you deduct portions annually via capital cost allowances.

Dividend Payments

Money paid out to shareholders in dividends isn’t tax deductible since it comes from business profits after expenses are deducted.

Top Tax Deductions for Small Businesses

Now let’s get into the expenses business owners commonly write off. Make sure documentation such as receipts and invoices are maintained in case HMRC requests them. Some of the most common include:

Office and Administrative Costs

Expenses for operating your office are almost always deductible. For example:

• Rent/mortgage interest on office space
• Office utilities like electric, heat, water bills
• Phone, internet and mobile costs
• Office supplies – paper, pens, equipment etc.
• Postage and shipping fees
• Subscriptions related to operating the business
• Accounting, bookkeeping and payroll processing fees

Motor and Travel Expenses

Costs for business-related transportation and travel are usually deductible. Examples are:

• Fuel costs
• Vehicle insurance
• Maintenance and repairs
• Parking fees and tolls
• Taxis, trains, car services for work trips
• Airfare
• Lodging when traveling for work
• 50% of meals when traveling overnight

Marketing, Advertising and Promotion

All reasonable costs for promoting your business to gain clients/customers can be deducted. Such as:

• Print, TV, radio and online advertising
• Website hosting fees
• Business cards
• Signage
• Sponsoring events or teams
• Giveaway merchandise with company branding

Staff Costs and Home Office

What you pay your staff in salary/benefits is deductible. If employees work from home, a portion of household expenses like mortgage interest, rent, utilities and internet can also sometimes be deducted.

As you can see, most ordinary expenses for operating your business are likely included. The key is keeping detailed records and being able to prove the purpose behind each cost. Speak to an accountant if you need clarification on whether a specific expense qualifies. Staying on top of your deductible expenses each year can result in major tax savings.

At Ballards LLP we are experienced in what are allowable business expenses for tax purposes and so get in touch with Ben Allman on ben.allman@ballardsllp.com for more information.

Disclaimer. This article has been prepared for information purposes only. Formal professional advice is strongly recommended before making decisions on the topics discussed in this release. No responsibility for any loss to any person acting, or not acting, as a result of this release can be accepted by us, or any person affiliated with us.