KPMG · 26 February 2016

What can I put down as being tax deductible for my micro business?

Expenses which may not seem worth the bother and inconsequential over a week, will add up over the year
Expenses which may not seem worth the bother and inconsequential over a week, will add up over the year

If you’re self-employed, you will of course have a range of running costs and expenses, which you can take away from your business income to assess the profit in your accounts.

To work out what’s permitted as tax deductible, a simple consideration can be helpful, according to KPMG’s Bivek Sharma. “The ultimate standard is if the expense is wholly and exclusively for business, then it’s fine,” he said.

You can’t deduct costs for non-business or personal purposes, for buying or improving fixed assets or capital items which last for several years or costs which are recoverable under an insurance policy.

VAT should be considered too, as it can affect the amount you include in your allowable expenses – if you are VAT registered, use the net amount to reduce your turnover, though you can only do this if the VAT on that expense is recoverable. You should also show turnover net of VAT. Receipts and allowable expenses can be shown gross with the net payment to HMRC classified as an expense. On the other hand, if you’re not VAT registered, use the total amount spent on the expense.

Sharma said that while tax can be tricky to navigate here, the majority of what you assume counts as a business expense is likely to be one. “Stationery for example is deductible,” he said – with phone, mobile, internet, email and fax running costs all allowable expenses alongside postage, printing and small office equipment costs.

On the flip side, non-business or private use proportion of expenses (new phone or fax or other equipment costs) would not be tax deductible.

When it comes to client entertaining “that’s a no-go”, so any hospitality at events or entertaining suppliers, customers or clients can’t be claimed as expenses.

“It’s worth taking a little bit of time to go through tax rules. Most business owners won’t know them inside out, but it can really help your firm to look into it,” Sharma advised.

If the prospect of going through everything yourself is too daunting, he suggested getting an accountant on board to help explain, so owners can understand why certain things have been deducted.

There are some areas you may not have considered – subscriptions, for example, can be claimed for trade or professional journals and trade body or professional organisation membership if related to your firm. Claiming for payments to political parties or gym memberships won’t be allowed.

Staff expenses encompass employee salaries, bonuses, pensions, benefits, agency fees, subcontractors and employers’ National Insurance, but don’t expect to be able to claim for carers or nannies.

While entertaining in general isn’t permitted, there is usually some room when it comes to staff entertaining, such as a Christmas party. Expenditure of up to £150 per head on an unusual staff function can be exempted from income tax charges and employers’ National Insurance.

It’s often home businesses that Sharma feels miss out on claiming the expenses each should be. “If you’re working from home, it can be more difficult to ascertain what is for home use and what’s for business.”

Also, remember that expenses which may not seem worth the bother and inconsequential over a week, will add up over the year – such as a business owner running a cupcake business. Other than utilities, washing up liquid could be claimed as an expense. The proportion of household bills to claim can generally be worked out based on the number of rooms in the house and how often they are used for business.

Fundamentally, Sharma feels “it’s worth taking the time to get it right”, whether that means familiarising yourself with the government website or with an accountant to explain it to you. “The last thing you want is HMRC investigating your returns, when really all you want is to be focused on the day to day running of your business.” he said.

If you went over spent on the Christmas party last year, and want some advice for your bash later in the year, here’s why small business owners don’t need to blow the bank on annual staff do.

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ABOUT THE EXPERT

Bivek Sharma has been a partner with KPMG for over ten years, specialising in accounting, tax and software. He started the Small Business Accounting division over two years ago with a goal to transform accounting services for small businesses. The team works with a huge variety of industry sectors and companies including coffee shops, technology companies, manufacturers, pubs, restaurants and retailers.

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