Distinguishing between allowable and non-allowable business expenses

When you are running a freelance business, it’s vital to distinguish between allowable and non-allowable business expenses with regard to tax treatment – and yet, doing so can be fraught with anxiety. That’s why, in today’s blog from accountancy services provider Freelancer Accounting (http://www.freelanceraccounting.com), we consider the basic rules.

Put simply, allowable expenses are those that are incurred wholly and exclusively for the purpose of earning business profits, which is why you can either fully or partially deduct them from your turnover for the purpose of reducing the business’s tax liability. Examples of such allowable expenses include goods that you have bought for resale, although for closing stock, an adjustment will need to be made. The likes of wages, rent, lighting, heating and repairs are also allowable expenses.

There are also costs, however, that you incur for a non-business purpose, and which our small business accountants would advise you to class as non-allowable. Examples include your own personal expenses or drawings, capital costs and costs which are recoverable under insurance, although neither of these aforementioned lists is exhaustive.

In general, we would advise that an expense paid by the company is not allowable unless it has been incurred wholly and exclusively for purposes of trade. An expense is normally deductible for the company if it results in a benefit in kind for an employee. If the business has sole trader or partnership status, then there is a restriction to the amount of expense that is allowable for tax purposes as a result of any private use by the owners. Expenses that the employee has paid are only allowable if they have been wholly, exclusively and necessarily incurred in the performance of the office or employment’s duties.

When you are determining whether a particular expense is allowable or non-allowable, you will need to consider all manner of factors on which our accountants for contractors can advise you in greater detail. Consider, for example, whether any given expenditure has a dual purpose element, as it will not be allowable for taxation if it does. For example, although you may buy a suit or dress to wear at work, the fact that you need to wear clothing anyway renders it a non-allowable expense.

For many business expenses, there is some ambiguity as to whether certain elements may, or may not be allowable. With regard to legal and professional fees, for example, fees for preparing your company accounts relate to your trade, and are therefore allowable. However, if you incur legal fees on taking on a new lease, their relation to capital means that you will not be able to claim tax relief on them.

We could continue in much more detail, but really, when you have a core business to focus on, it can be a significant benefit to have a PCG accountant from Freelancer Accounting (http://www.freelanceraccounting.com) by your side to take the hard work out of making these distinctions. Get in touch now to find out more.