As bookkeepers for tradespeople based in Chichester, clients frequently ask us, “What expenses are tax deductible?” So, in this article, we thought we’d share some jargon-free information to answer that question. Read on for all the details!

What expenses are tax deductible? A brief overview:

In your business, you have sales and expenses. If you subtract the total expenses from the total sales, what you have left is profit. You have to pay tax on your profit. So, it makes sense to maximise your tax-deductible expenses.

Your expenses include all kinds of costs. Some are tax deductible, and some aren’t.

Tax-deductible expenses and tax-allowable expenses mean the same thing. These expenses are essential and directly related to running your business, as deemed by HMRC. These expenses can be deducted from your taxable income, reducing your profit and, therefore, your income tax liability.

There are also business expenses that are not tax-allowable. These are still genuine business expenses. However, they don’t reduce your taxable profit. Nevertheless, it’s essential to be aware of them. Knowing whether an expense is tax deductible can help you decide what to spend your money on.

Documentation and Record-Keeping:

It’s best practice to document all your expenses, tax deductible and otherwise. The simplest way is to use an app like Hubdoc to keep electronic copies of invoices and receipts, which can be attached to the transactions in Xero. This makes them easy to find if you need to refer to them (or if HMRC ever asks for proof!)

It’s essential to track the nature of the expense. Your accounting software will show many expense categories, such as Fuel, General Expenses, Insurance, Travel, etc.

In Xero, you can create as many categories as you’d like to make it easier to understand your business expenses. It’s good practice to keep deductible and non-deductible expenses in separate categories to make the corporation tax calculations more straightforward.

At Tradermate, we help our clients by setting up a Chart of Accounts that suits their businesses. We’ll add specific categories for the expenses they want to split out. By using your chart of accounts well, you’ll see a helpful picture of business income and expenditure when reviewing profit and loss reports.

Types of Tax-Deductible Expenses:

Travel and Entertainment Expenses:

As long as it is a business expense, travel expenses can include the following:

• Vehicle license fees
• Insurance
• Fuel
• Repairs and servicing
• Breakdown cover
• Hotel rooms
• Meals (if you are staying overnight on a business trip)

However, you can’t claim for travel between home and work or for any driving or parking infringements.

Entertainment expenses fall into two categories.

• Business entertaining (Entertainment 100%)
• Non-business entertaining (Entertaining 0%)

Business entertaining is tax allowable, but non-business entertaining is not.

An example of business entertaining would be a staff breakfast, and an example of non-business entertaining would be taking clients out for drinks.

Home Office Expenses:

If you use a home office, you can claim expenses for using your home as an office. These include rent, rates, utilities, insurance and security costs. However, you can only claim these expenses for the part of your home you use as an office.

The expense is calculated based on the number of rooms in your home. So if you have five rooms and one is an office, you can claim one-fifth of those expenses.

Vehicle Expenses:

Vehicle expenses can be complicated. So, it’s worth talking to your accountant before you purchase or lease a vehicle through your business, particularly if you’re registered for VAT.

Professional Fees and Subscriptions:

You can claim any fees paid to an accountant, bookkeeper or solicitor if the work is directly related to your business. Furthermore, if you’re a professional or trade body member, you can claim for those expenses.

You cannot claim for any payments to political parties, or for gym membership, or charitable donations.

Equipment:

We recommend talking with your accountant before making substantial asset or equipment purchases. The purchase may impact your taxable profits depending on whether you use cash basis or traditional accounting as your accounting method.

Meals and Business Expenses:

As a rule of thumb, any food or drink expense that is usually part of your daily work routine is not considered a business expense. If you are staying out overnight for business, it’s reasonable to claim for an evening meal.

Common Mistakes:

One of the most common mistakes business owners make regarding deductible expenses is claiming for clothing and dry cleaning.

Clothing is only tax-allowable if it’s a uniform or protective clothing you need for your work. For example, if you’re a builder and need steel-toe capped boots, they are tax-deductible. It is not if you work in an office and wear a suit. You can’t claim for everyday clothing, even if you wear it for work or only for work.

You may also be able to claim laundry or dry cleaning for a branded uniform or protective clothing you wear only for work. This provision only applies to branded/protective clothing. Business professionals often try to claim for dry cleaning, but it’s not a business expense and definitely not tax-allowable.

Another common mistake is claiming gifts to customers or prospective customers as a tax-deductible expense. If you choose to give items as gifts to your clients, please be aware that small branded items are tax-allowable, but more significant or non-promotional gifts, such as bottles of wine, are not. 

Speaking to your accountant or bookkeeper is our top tip for maximising your eligible deductions. They will have a checklist to ensure you claim everything you’re entitled to. Don’t have a bookkeeper? Get in touch with us! We specialise in working with trade businesses and sole traders.