By Jonathan Amponsah CTA FCCA, The Tax Guys
Paying tax is always painful so like most businesses people you’ll want to make sure that you claim all legitimate expenses you incur for the business. That sounds good, however, the general rule that says you can claim all expenses incurred wholly and exclusively for the purpose of your business is not always simple and straight forward.
Let’s review some items you can’t tax deduct even if you incurred them for your business.
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 a 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.
Imagine you’re an actor who lives in Canterbury. You’ve secured a contract to shoot an exciting film in Edinburgh for three months. You realised hotel costs would be too high. So, you decided to rent an apartment for three months. Surely you can claim for the costs of the rent against your profits right? 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.
Here’s another scenario that might surprise you. You operate as a self-employed doctor or sole trader rather than 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.
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.
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.
Imagine you’re a barrister and you’ve purchase 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.
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 exclusive for the purpose of business rule? Not quite. Fines incurred for breaking the rules are disallowed.
Setting up a Trust for Staff Rewards
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.
Sponsorship of Events
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.
Political and Other Donations
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.
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.
Wages to Kids or Spouse
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.
ABOUT THE AUTHOR
Jonathan Amponsah CTA FCCA is an award-winning chartered tax adviser and accountant who has advises business owners on entrepreneurial tax reliefs. Jonathan is the founder and CEO of The Tax Guys. www.thetaxguys.co.uk