Business Expenses - Rules to Consider

Supporting your 'Business Wheel'

By Leanne Gurr FCA Chartered Accountant.

Have you ever handed over your year-end records to your accountant for self-assessment, after meticulously recording your expenses only to be told that you cannot claim for certain items? 

You may argue that the items in question were business expenses and not understand the logic, especially when you hear of ‘friends down the pub’ who are able to claim so much by comparison.   

In this edition, I am going to give you an insight into one of the rules and you will see why it can be tricky.

The Wholly and Exclusively Rule

An allowable expense is one incurred wholly and exclusively for the purpose of the trade, profession, or vocation. 

Using a self-employed yoga teacher as an example, it is clear that the hire of space to teach classes is a business expense and therefore allowed for tax purposes.

However, the yoga teacher would not be able to claim yoga pants as an expense as there will be a personal use not distinguishable from the business use. Even putting the yoga pants on in the morning an hour before teaching is classed as private use.  There is no way of separating correctly the private and personal use of such items and so the purchase of yoga pants would not pass the wholly and exclusively test and would be disallowed in the tax calculation.

If the yoga teacher had a dedicated yoga studio in their home, then an apportionment of certain household costs can be considered wholly and exclusively for the purpose of the trade.  In this case, the accountant would look at larger expenses and use a ratio based on say the number of rooms and the hours spent working to calculate the amount allowable for tax. 

Outrageous Claims  

Keeping it light-hearted, here are some expenses people have tried to claim in the past. Do you think you could convince HMRC that these claims were within the rules? Well, some people did try, but of course, HMRC said no!

  • Vet fees for a rabbit

  • 55” TV for a carpenter to price up jobs

  • Woolly underwear

  • Pet dog insurance

  • Luxury watches as staff gifts in a business with no staff

  • Armani jeans for a painter and decorator

  • Caravan rental for Easter weekend

Surely I Can Claim... 

The rules can also throw up some surprises that you might think should be allowed:

  • An eye test – as a self-employed individual, it is difficult to say that an eye test does not have a general benefit to health. As such it does not meet the criteria of being wholly and exclusively for the purposes of the trade, profession, or vocation. It is therefore a disallowed expense.

  • Glasses – the personal benefits of glasses or contact lenses mean that these are not allowed as business use cannot be distinguished. However, if the glasses are only used for work, then they may be allowable in certain limited circumstances.

  • A suit that you only wear for clients – HMRC have specific rules on clothing allowed for tax purposes.  Most clothing can be classed as part of an ‘everyday wardrobe’, like the yoga pants example and therefore because it has more than one purpose is fully disallowed.  However, clothing that is allowable would include uniforms, protective clothing, and costumes for those in entertainment industries, i.e. items you would not or could not wear in a non-work-related environment.

As you can see, this can be a minefield with the same thing allowable in some situations and not in others.

The rules are to be applied to your business objectively and independently of what you may have heard from your ‘mate down the pub’. 

I always say to my clients that if you think it is a business expense, then put it in your records so I can filter out what is allowed and what is not. I am always happy to explain why something would be disallowed.

The tax return season is ramping up for accountants, so you may hear some ‘interesting’ claims. If it sounds too good to be true it probably is, so make sure you seek advice.

I'm always here to offer some support and answer any questions.

Kind regards, Leanne