There are a number of running costs when you own your own business, and in most cases you can deduct these costs from your income to determine how much profit you’re making.
Not all expenses are deductible as only some can be refunded for tax purposes, however you can claim capital allowances for one-off expenditures used to improve assets in order to reduce your taxable profits.
It’s the general rule that you can claim back any costs that have the sole purpose of earning profits for your business. There are some cases where you are limited in the amount of time you have to claim back your tax, but usually expenses, reliefs and allowances can be recuperated for the current tax year and the previous four years.
The tax-deductible allowable expenses are the costs that you spend while earning business profits. You’re not allowed to claim for non-business or personal items, but you are allowed to claim tax back on capital items that improve your business, for example; machines, stock or office equipment.
Tax deductions are available to help people manage their business accounts, there are many services that are available to help self-employed people manage their finances – accountants for contractors, for example.
These purchases must be related to your business in order to claim back tax expenditure, and they must also be shown separately on your Self-Assessment tax return.
There are many things that you can claim back in order to reduce your business expenses. Accountancy and professional fees, rent, power and water bills, advertising, insurance, postage and uniforms for staff are all tax deductible. However there are different amounts of deduction for every business and expenditure, and the type of expenditure determines the amount of tax relief you receive.
There are three types of expenditures or costs that are associated with running a business; capital, business and private.
Assets that you purchase to create, improve or make profit for your business are classed as capital expenditure. For example, buying premises for your business, machinery, fixtures and computers are all capital expenditure.
You can also get tax relief for your business for entertaining expenditures and other specific non-allowable costs. In order for this expenditure to qualify as tax-deductible, it must be ‘wholly and exclusively’ for making profit for your business. In other words, the sole reason for the expenditure must be to make money for your business.
You can also benefit privately from some business expenditures in terms of tax relief, as long as the benefit was completely ‘incidental’ and you can identify and separate the private and business expenditures when applying for tax relief.
This type of expenditure can be accounted as day-to-day living, as well as household expenses and living costs. It also includes your ‘wage’ that you take from your business, or your ‘drawings’. This type of expenditure is non-allowable, and you will not be allowed to get tax relief from it.