In
order to fully discuss and examine business expenses, the accounting definition
of expenses as to be identified. This will help determine what expenses are
allowable (deemed acceptable by HMRC) and disallowed (expenses that cannot be
credited in the financial statements).
Business expense in accounting
can be defined as an outflow of money or an asset to perhaps a supplier in
exchange for goods or a service. Some accountants would add to this definition,
and say that an expense
is when any form of liability is incurred. So therefore an expense is a loss to the business proprietor because it decreases the owner's equity.
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Allowable Expenses
An allowable business expenses
are incurred only for the business's purposes or needs. This is usually phrased
as 'wholly and exclusively' spending or expenditure which are tax deductible.
This is relatively easy, anything that adds value to the business is an
expense. Common expenses such as lighting & heating costs, office
stationery, business travel & subsistence (food and drink) and rent can be
found in almost every business or company.
Taking taxation into
consideration, there is not as straight forward application. This is due to
expenses that may have a business and personal component, which is trickier to
determine and apply.
This will prove harder for
business owners or self-employed people to differentiate or draw the line
between personal and business costs. For example a company car can also be used
as the family car by the owner of the business.
Disallowable Expenses
Disallowable expenses are expenses that are not incurred "wholly and exclusively" for business and trade purposes. Examples of disallowable expenditure are; council tax for your house, clothes not part of uniform, entertaining, donations to charities and your salary if you are the business owner.
These expenses are not
allowable because they are not acquired for the company's uses or benefit. The
tax return form indicates what expenses are allowable. this will therefore give
you a strong indication of what expenditure that HMRC will permit or
accept.
Wholly and Exclusively
This is very applicable to self-employed
people because the lines can get blurry or crossed as to a business expense is
and a personal expense. For business owners it is of great benefit if an
expense can be both business and personal. Apportion is a term used in
accounting when an expense meets the requirements to be the 'wholly and
exclusively', then people (self -employed) can claim a tax deduction.
An example of apportion in
practice is Mike, who is a self-employed plumber. Mike owns only one van that
he uses to carry his tools and to drive to and from his client’s homes. However
he also uses it in his personal life to pick his son up from school. It is
clear which instances he uses is van for business and which he uses for is
personal life. So in this scenario, Mike's journey to work will be classed as
'wholly and exclusively' because it meets HMRC requirements and the percentage
of the cost should be deducted from the business's expense. So the journey he
makes in his business life such as picking his son up from school can be
deducted and classified as a business expense.
In order to calculate these
types of expenses, HMRC advises that people should monitor their usage over a
specific period of time in order to determine the total amount of expenses that
is deductible.
Duality is a concept used to
explain expenses that have a dual purpose, meaning they serve both personal and
business needs. This means that they are not deemed to meet 'wholly and
exclusively' rule. So this therefore suggests that not all scenarios are as
clear cut as Mike's.
Let’s take Jane for example is
a detective and has a smart dress code, this means that she will have to buy a
lot suits and office acceptable outfits. Even though Jane only wears suits for
work they do not meet the requirements to be 'wholly and exclusively'.
However if she was just a
patrol officer she would need to wear a helmet and protective clothing (such as
bullet proof vest). Any uniforms costs like this will be classified as a
business expense.
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Published on: 02/08/2016
Disclaimer: The information provided in this blog is brought to you by Taj Accountants. As you are reading this blog of your own free will, any information taken from this blog is at your risk. Before using the information provided to apply, to your business seek professional or legal advice. Taj accountants will not be liable for any damages.
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