Business Expenses – A few basic rules

Over the years I have seen some amazing claims for what taxpayers believe should be an allowable expense against their profits. From make-up to pet food for the guard dog.

With this in mind I thought it worthwhile just going back to a few basic rules.

The “Wholly and Exclusively” Rule

This is the absolute basic rule by which HMRC consider each and every deduction as a business expense for tax purposes.

This means that an expense is not allowed if it is not:

“incurred wholly and exclusively for the purposes of the trade of…”

Whether an expense meets this rule is determined at the time the expense is incurred and not at a later date.

The “No Deduction for Private Expenditure” Rule

Building on the above rule there can be no deduction from trade profits for any expense that is not incurred for trade purposes.

Therefore, any private expense cannot be deducted and must be ignored when calculating profits. It is important to note that any non-trade expenses cannot be deducted if there is no “objective yardstick” by which to distinguish the trade element from the non-trade element.

This effectively means that where there might be mixed use then provided it can be measured as to which is for trade and which is not then the mixed-use expense can be apportioned for deduction purposes. An example might be the mixed use of a mobile phone where the business owner can apportion both the business and private use to the costs incurred.

The “Duality of Purpose” Rule

This rule is enormous and is one that is so often overlooked.

Going back to the first rule we saw that the expense must be incurred wholly and exclusively for the purposes of the trade. I’ve deliberately highlighted the word exclusively as this is the key to this rule.

If an expense has a duality of purpose, then the expense will fail this test and therefore none of the expenditure is deductible.

By their very nature some expenditure has an intrinsic non-trade purpose and must therefore be disallowed. This is an area that often catches out business owners and here are a few examples:

Clothing – any form of civilian clothing (ie not PPE) that you could wear should you choose to is disallowed. Even if it’s the finest suit to meet top clients or a tee shirt and you only want to wear on the building site it does not count.

Spectacles / Contact Lenses – You might feel these are vital so you can see for work but you might also need them to watch TV or read the Sunday newspaper, so they don’t count.

Food and drink – Perhaps the biggest of all. Food is not allowed as we all eat to live so fails the wholly and exclusively test

Chiropractor / Massage – Indeed any form of health treatment fails the test as we all wish for good health so even if you are injured whilst working and need treatment this is not a business expense

Fines – Parking, Motoring or indeed any fine is not incurred wholly and exclusively so fails the test. None of us want a conviction especially if there is a custodial sentence.

Helping ones nearest and dearest – we all want to do this so providing them with some assistance cannot be a business expense.

Make-up / Haircuts and colours – as I have to be presentable for my job

Dog Food and Vet Bills – For the “guard dog”. Nope.

There are many more and I’m sure you can think of your own examples where you might think an expense counts but when you apply the wholly and exclusively rule alongside the duality of purpose rule it fails the test.

If you are ever unsure as to whether an expense will count just get in touch for guidance.