If you’re running a business, it’s as important to understand the type of business expenses you cannot claim against tax as those you can. Deductible expenses are those where making a purchase is essential for your business operation. Non-tax-deductible expenses on the other hand, are those that are not necessary for the operation of your company.
With most expenses, it’s straightforward to work out whether or not they are tax-deductible, but with some expenses there are grey areas. This could mean that companies erroneously claim for expenses that aren’t deductible, and conversely, others could be not claiming for expenses that are.
Entertainment
Holding a meeting over a working lunch is a great idea in terms of client relations, but sadly, it is not a tax-deductible allowance. According to the bureaucrats, client meetings can be held without any refreshments at all, which is why refreshments are non-tax-deductible (… although try not offering your potential clients or suppliers a cup of tea and see how fast they go to the competition!)
On the other hand, when it comes to your staff, entertainment expenses are tax-deductible … but only to a point. If you spend less than £150 per employee across the entire year on staff parties (which includes food, drink, taxi fares home etc), then it is tax-deductible. But if you spend £150.01 upwards, then it counts as non-deductible. And as it’s an ‘all or nothing allowance’, meaning the entire amount is taxable – even if you only spend £150.01 – and must be declared as a staff benefit on the P11D form.
Some travel expenses
It depends how generous your company is feeling when it comes to travel expenses, but if you want to push the boat out and send your staff first class to stay in five-star hotels, you need to understand that lavish extravagances aren’t tax-deductible. Sorry. You can only claim for employees’ ‘reasonable’ expenses.
Asset depreciation
It’s a fact of life that your company vehicles, equipment and technological assets will depreciate in value as they get older. As an unavoidable consequence of usage and time, depreciation is non-tax-deductible.
However you can deduct capital allowances from your profits for various elements of your business: see the Government’s website for details, or ask us.
Building improvements
Necessary repairs to the building, plumbing or electrics are tax-deductible, but if you want to upgrade, update or rebrand the place, it’s classified as non-essential work and is therefore non-tax-deductible.
However, improvement costs will be deductible for capital gains tax purposes as enhancement expenditure when selling the asset
Legal fees
Legal fees are a complicated thing when it comes to whether or not they are tax-deductible. To be on the safe side, it’s best to check with your accountant.
We have highlighted some examples of allowable and non-allowable legal expenses:
Allowable
- Legal fees relating to debt collection
- Legal fees relating to employment matters
- Legal fees relating to disputes regarding trading matters
Non-allowable
- Legal fees relating to a company reorganisation
- Architects fees for building improvement work
- Legal fees relating to the acquisition of investment property i.e. shares in other companies
If you want help navigating through the maze of deductible and non-deductible expenses, contact us to make an appointment with one of our tax specialists.
