No one wants to pay more business tax than necessary so, of course, you want to claim all the legitimate expenses you can. However, most people are surprised to discover that there are some things you cannot tax deduct even when you incurred them for your business.
Jonathan Amponsah CTA FCCA, from The Tax Guys, reviews some of the areas that can catch people out and where HMRC will say that expenses are not wholly and exclusively for the business.
1. Parking Fines
Your business is delivering some items to a customer. The driver parks for a few minutes and get a parking ticket. Surely the reason for the fine is because of business activity so it should fall under the wholly and exclusively for the purpose of business rule? Not quite. Fines incurred for breaking the rules are disallowed.
2. Promotional Gifts
It’s true that nothing ever happens in business until a product or a service is promoted and sold. And when it’s sold at a profit, tax gets collected accordingly. However, if you promote your business by spending too much money on promotional gifts to customers and the gifts cost more than £50 per customer, you won’t be able to deduct these costs against your income. Even where the gift cost £50 or less, make sure it carries a conspicuous advert for your business.
3. HMRC Penalties
Penalties imposed by HMRC and other government departments are not tax deductible. So, avoid those penalties and get your accounts and tax returns done on time.
Imagine you’re an actor who lives in Newcastle. You’ve secured a contract to shoot an exciting film in Dorchester for ten weeks. You realised hotel costs would be too high. So, you decided to rent an apartment for ten weeks. Surely you can claim for the costs of the rent against your profits? Well, it makes sense but HMRC will deny the claim on the basis that the expenses were not incurred wholly and exclusively for the purposes of your profession as an actor. Why? One of the reasons HMRC will put forward is that there is a dual purpose in incurring the expenditure, namely to meet your ordinary needs for warmth and shelter as well as your stated business purpose.
5. Client Entertainment
As part of your sales and marketing, you decide to take clients to a relaxed restaurant to discuss new business. The purpose is to negotiate and generate new business. The income will be taxed so the expenses should be ok to put through the business, right? Unfortunately, the rules specifically disallow these expenses to be claimed against tax. Part of the reason behind this is that you could have had the same conversation over a cup of tea in the office, plus there is an element of personal benefit in the entertainment.
Here’s a scenario that might surprise you. You operate as a self-employed doctor or sole trader rather than a limited company. You have a home-based office. You travel to see different patients or clients on a regular basis. Your journey starts from your office (at home) and includes a few itinerant travels from one client to the other client. Can you claim the full travel expenses? Logic will tell us that yes. However, the rules deem the travel from your home office to patients/clients as ordinary commuting and therefore not tax deductible.
7. Clothes for Work
Imagine you’re a barrister and you’ve purchased your gown to be worn in court. You don’t wear this gown in public. Can you go ahead and claim the cost of the gown against your tax? Not according to the famous tax case of Mallalieu v Drummond which established that “no deduction is available from trading profits for the costs of clothing which forms part of an ‘everyday’ wardrobe. This remains so even where the taxpayer can show that they only wear such clothing in the course of their profession.”
However, some protective and work clothing with logos and other business branding are claimable. If in doubt, speak with a tax accountant.
8. Staff Reward via Trust
Your staff are well engaged within your business and you want to reward them. You decide to make payment into a Trust to demonstrate that the money has been earmarked for them and waiting to be paid when they hit their targets.
As the money has been paid out of your bank account to the Trust, can you claim it as a legitimate business or staff expenses? Unfortunately, not. Because of a specific tax avoidance rule, this legitimate expense cannot be claimed.
Donations made to political parties and non-registered organisations outside of the Gift Aid regime cannot be claimed against tax. This is to stop businesses offsetting costs through privately owned ‘non-profit’ organisations.
10. Wages to Spouse or Kids
A great way to keep more of your cash within the family is to employ your spouse and kids. And there is nothing wrong with this plan. However, where you pay family members over and above the market rate, where they don’t actually perform any task for the business or where you’ve structured this working arrangement incorrectly with no evidence or paperwork to back up your plan, HMRC will not allow their salaries to be put through the business. Do take care with this as it’s currently a hot spot for HMRC enquiries.
Sponsoring an event is another area that might surprise you. HMRC will disallow the cost if they can show that perhaps the sporting field you are sponsoring is a director’s, partner’s or proprietor’s regular hobby or if the party being sponsored is a relative of the business owner, or if there is no proposed or actual return on investment from the sponsorship.
So, the trick here is to ensure that the sponsorship deal is structured correctly and there is a clear commercial benefit for your business.
12. Legal Expenses
Legal fees can be expensive right…? And whilst they do add value to your business and may save you from making costly business mistakes, not all legal costs are tax deductible. For example, fees in connection with the purchase of business premises or investing in shares are disallowed.
In addition, fees that have both personal and business elements may fail the wholly and exclusive test. And legal costs associated with breaking the law are also disallowed. For example, where you’ve got a parking fine and you decide to call your lawyer to defend the case and you lose, you won’t be able to claim the legal fees.
About the author
Jonathan Amponsah CTA FCCA is an award-winning chartered tax adviser and accountant who has advised business owners on entrepreneurial tax reliefs. Jonathan is the founder and CEO of The Tax Guys
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