Tax & Admin

What Are Tax-Deductible Expenses?

Allison S Robinson | 13 September 2022 | 2 years ago

Tax Deductible Expenses

When it comes to taxes, there are several aspects that can be overwhelming and confusing for people. One of the most common questions asked is “What are tax deductible expenses?” Simply put, tax-deductible expenses are expenses that are incurred in operating your business or as a self-employed person which you can write off from your total tax bill. 

In this article, we will explain exactly how tax-deductible expenses work, the different types of expenses you can claim and how to do it. So whether you’re self-employed or own a small business, continue reading to learn more about your tax-deductible expenses.

What are Tax-Deductible Expenses?

In simple terms, tax-deductible expenses are those sustained in running your business or self-employed income which can be offset against your taxes, reducing the amount you owe each year. There are two main types of tax-deductible expenses: direct and indirect.

Direct expenses are those that are directly related to the generation of income, such as materials and labour costs. Indirect expenses are those that are not directly related to income generation but are necessary for the operation of the business, such as office rent and utilities.

You can claim both direct and indirect expenses on your tax return. However, there are some restrictions on how much you can claim for indirect expenses. For example, you can only claim a certain percentage of your office rent or utilities based on the proportion of the office space that is used for business purposes.

Who is Eligible to Claim Expenses?

The answer to this question depends on your employment status. If you are self-employed or own a business, you’ll almost certainly be able to deduct a large portion of the costs associated with maintaining your company. However, if you are an employee, it is very unlikely that you will be able to claim any expenses against your taxes. This is because if you are in PAYE employment, it is expected that your employer will provide you with everything you need to do your job so there should be no expenses necessary.

Don't Leave Any Expenses Unclaimed

Why Am I Allowed to Claim Tax-Deductible Expenses?

The government allows businesses and self-employed people to claim tax-deductible expenses as an incentive to encourage entrepreneurship and business growth. Allowing businesses to offset these expenses against their taxes provides them with some financial relief and allows them to reinvest in their business. A tax deduction reduces your taxable income and your tax bill goes down as a result of this reduction. By claiming these expenses on your taxes, you are effectively being reimbursed for the costs incurred in running your business.

When Can I Claim My Tax-Deductible Expenses?

You can claim your tax-deductible expenses in the tax year in which they were incurred. For example, if you incurred expenses in 2022, you would claim them on your 2022 tax return. If you have expenses from previous years that you have not yet claimed, you can do so on your current year’s tax return. For example, if you incurred expenses in 2020 but did not claim them until 2021, you would include them on your 2021 tax return. You must claim within four years of the conclusion of the tax year in which you spent the cash. If your claim is for the current tax year, HMRC (HM Revenue and Customs) will generally adjust your tax code as needed.

How Do I Claim My Tax-Deductible Expenses?

There are two main paths to claim your tax-deductible expenses: through your self-assessment tax return or by submitting a P87 form to HMRC.

If you are self-employed, you will need to include your expenses on your self-assessment tax return. This form must be submitted to HMRC each year detailing your income and expenses for the year. You can complete and submit your self-assessment tax return online. You are not required to send proof when you submit your return but it would be judicious of you to keep detailed records should the HM Revenue and Customs inquire so that you can provide them with corroborating evidence for your claims.

If you own a small business, you may be able to use the P87 form to claim your expenses. The P87 form is a shorter and simpler version of the self-assessment tax return. To use the P87 form, you must first register your business with HMRC. You can then complete and submit the form online.

Claim Your Travel Expenses

What Expenses Can I Claim?

Travel and Transportation

You can claim travel expenses if you need to travel for business purposes, including airfare, lodging, and meals. Keep a detailed list of all expenses you must pay while on business travel. This includes your dining expenses, lodging and all transportation costs, including petrol if you are driving.

If you are using your own vehicle for business travel, be sure to track your mileage and vehicle expenses. You can do this manually or you can simplify the process by using a flat rate for mileage instead of the actual costs of buying and running your vehicle such as insurance, repairs, servicing, and petrol.

Cars’ and goods vehicles’ first 10,000 miles get a flat rate of 45p per mile for the first 10,000 miles. After 10,000 miles, it drops to 25p per mile. Motorcycles are also eligible if used for your business, with a flat rate of 24p per mile. Take the time to work out your vehicle expenses to see what method is best for you and your business.

Office, Property and Equipment Expenses

Renting or leasing an office space? This is another expense that is eligible for a deduction. A deduction may also be claimed for the typical costs of running your business, such as utilities, insurance, and maintenance. You may deduct the cost of any property or equipment you use for commercial purposes, such as computers, furnishings and instruments.

If you work from home, you may deduct a portion of your mortgage interest or rent, as well as a portion of your utility expenses. Similar to the flat rate calculations used for your vehicles, you have a similar option to use a flat rate to simplify your expenses if you work from home.

If you work 25 to 50 hours per month, your flat rate is £10 per month. 50 to 100 hours per month will make you eligible for £18 a month. Finally, if you work from home more than 101 hours a month, your flat rate will be £26 per month. Keep in mind if you choose to calculate your expenses manually, the UK government does not allow you to include any home phone or internet as deductible expenses.

Some businesses such as guesthouses, bed and breakfasts, or small care homes, use their commercial premises as residences and HMRC also has a flat rate for these businesses to claim their expenses.

Office, Property, and Equipment expenses can be difficult to track because you may have hundreds of different purchases throughout the year. Using the simplified flat rates where possible may be your best bet but should you choose to manually track these expenses, there are a variety of accounting applications that can help you keep track of your expenses throughout the year.

Stay Orgainsed Throughout The Year

Legal and Financial Costs

You may claim a deduction for the cost of legal or financial services should you have to pay for them as a result of your business. This includes accounting services, architects, tax preparation fees, all legal advice and professional liability insurance payments. Allowable business expenses can quickly add up in this area so make sure you’re keeping a close eye on these costs. While your legal fees may be deducted, if you are required to pay any fines, they are not considered a deductible expense. If you are dealing with large sums of legal and financial costs, it is advisable to speak with a professional advisor so they can help you maximise your savings.

Plant and Machinery

What is considered eligible for a deduction under Plant and Machinery? Large items that you keep to use in your business such as cars or machines, parts of a building considered integral, known as ‘integral features’, and alterations to a building to install other machinery. Keep in mind that this does not include standard repairs.

Integral Features include:

  • electrical systems, including lighting systems
  • space and water heating systems
  • external solar shading
  • lifts, escalators and moving walkways
  • air-conditioning and air cooling systems
  • hot and cold water systems (but not toilet and kitchen facilities)

Fixtures:

  • fitted kitchens
  • bathroom suites
  • fire alarm and CCTV systems

Training Courses

If you have enrolled yourself or your staff in training programmes that are relevant to your business, these continuing education courses are deductible expenses. These expenses apply to courses and seminars that refresh existing business or professional knowledge, including training required to preserve membership in a professional body.

A deduction is available for the cost of education courses, tuition fees, books, and materials. However, any course or training that you claim must be relevant to your current business or they are not eligible. Continuing education courses are often overlooked when claiming expenses, as many people do not realise they are eligible expenses for deductions.

Marketing and Subscriptions

When it comes to claiming expenses for marketing and subscriptions, it is fairly straightforward. You can claim your advertising costs across the board, including newspaper, digital, bulk standard post, and even sending out free samples.

If you or your business subscribe to trade or professional journals, you can claim those subscriptions as expenses. Also, if you are a member of any professional organization or trade body that is directly related to your business, these expenses are also claimable.

Your business is not permitted to claim expenses related to entertaining clients, suppliers and customers. There are different rules for the entertainment of your employees. You’re allowed to claim up to £150 per person 300 per couple) towards entertaining and rewarding employees and their partners. Be aware if your claim is over this limit, the TOTAL amount becomes a taxable benefit to the employee.

Can I Claim Charitable Donations as Expenses?

In most cases, you cannot claim charitable donations as expenses. You can, however, if your business is a limited company, deduct certain qualifying donations from your Corporation Tax bill. This is called ‘Gift Aid’. Gift Aid is a government scheme that allows charities to reclaim the basic rate of tax (currently 20%) on a donor’s gift.

If you are a higher or additional rate taxpayer, you can claim back the difference between the rate of tax you pay and the basic rate on your self-assessment tax return. To benefit from Gift Aid, the charity must make a claim. This is done by simply completing a form (contact the charity if you don’t have the form because they will be accustomed to the process). 

Each charity you want to contribute to through Gift Aid requires a separate declaration. If you do not have to send a tax return, contact HMRC and ask for a P810 form. Complete and submit the form before 31 January after the end of the previous tax year to be eligible. You are not allowed to claim for any donations to political parties.

Keep Your Expenses Honest

What Happens If You Falsify Your Expenses?

Falsifying any of your business expenses is considered tax fraud and can result in criminal charges. You may be fined up to £3000 if you are discovered to be claiming personal expenses as business ones. In addition to the fine, you will also have to pay back any taxes that were evaded plus interest and may also face further penalties including prison. It’s better to be safe than sorry so be honest in what you claim as an expense.

Final Thoughts

As you can see, when it comes to taxes, there are a lot of different tax-deductible expenses that you can claim for your business. This can be incredibly beneficial in reducing the amount of taxes that you owe but it’s important to make sure that you are only claiming expenses that are business-related. If you have any additional questions about what is and is not tax-deductible, speak with a professional or visit the HMRC website for more information.

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