Avoid UK Tax Problems by Knowing What Business Expenses are Disallowed
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The costs of goods, materials or services purchased by a business which are
for private use are not allowable for tax purposes. The disallowed element also
applies to goods and materials bought for business use which are subsequently
used for private use.
Payments made by the business for none business work are not allowed.
A limited company can claim the wages and salaries of directors as a valid
business expense. If the business is self employed then the proprietors own
wages and drawings are not allowable as business expenses as such costs are
distributions of the net taxable profit and not deductions from it. Also
included in this category of disallowed expenses relating to the proprietor
wages would be national insurance contributions, income tax payments and pension
Pension contributions are an allowable personal expense which the small
business owner would claim as tax deductible from the overall tax burden but not
in the self employment accounts.
Motoring costs are a specifically defined area of non business expenses.
Private use of the vehicle which may be used for business purposes is not
allowed for tax purposes. Also disallowed are motoring fines including parking
fines, any legal costs involved. The capital cost of buying private vehicles is
not an allowable expense and also disallowable are travel costs from home to
place of work and meals not associated with business travel.
The cost of any non business premises or non business part of the premises is
disallowed for tax claims. The capital purchase price of premises is not allowed
as a tax deduction as such purchases are treated as capital assets and subject
to the tax rules applying to fixed assets.
Repairs of non business parts and equipment are not allowed as claims against
tax liabilities. Costs of improving or altering premises or equipment are not
allowed as tax deductions as these costs are added to the fixed asset costs and
claimable under the capital allowance rules.
Non business use including private use of telephones, faxes and computer
equipment and other hardware items are disallowed fore tax purposes.
Entertainment expenses of clients and suppliers are not allowed for tax
purposes. Also disallowed are expenses incurred for meals of non employees who
accompany the business owner on business trips unless that person has a valid
business reason for being on the trip. Hospitality is generally not an allowable
expense although entertainment of employees at Christmas or special events is
allowed within restricted financial limits.
The capital element when repaying loans, overdrafts or other financial
arrangements are not allowed as business expenses as these items are balance
sheet items and not profit and loss items, the profit and loss being the
calculation of the net taxable profit.
Bad debts represent an area where specific rules apply. Specific identified
bad debts are allowed for tax purposes but general bad debts where a percentage
is applied to the sales value as likely to become bad debts is not allowed as a
tax deduction. Debts which have not been included in sales turnover are not
allowed as such debts have not been accounted for and also bad debts on fixed
assets are not allowed as the loss is accounted for in the capital allowances
Legal costs of buying property or equipment are not allowed for tax purposes
as such costs are treated as capital expenditure and included in the purchase
price of the asset and subject to capital allowance rules for reclaiming
allowances over the life of the asset. Costs of settling tax disputes are not
allowable and also fines imposed upon the company bare not allowable tax
Depreciation of fixed assets is a management decision and not allowable for
tax purposes. If depreciation is deducted from the management accounts to report
the net profit for tax purposes the depreciation is then added back as the
allowable tax claim is the capital allowance applicable to those capital fixed
assets. Same with profits and losses on the sale of fixed assets which are
accounted for under capital allowances.
Specific work uniforms and clothing is allowable whereas ordinary clothing
albeit suitable for the work being carried out is not allowable.
Small self employed business may not claim donations to clubs, charities,
associations or political parties are not allowed for tax purposes.
Subscriptions to trade associations which could be connected to the business
objectives would be allowable as being for business purposes.
About the Author
Terry Cartwright is a qualified accountant in the UK designs
Accounting Software on excel spreadsheets providing complete Small Business
Accounting Software solutions for with single and double entry
bookkeeping solutions for limited companies and self employed business.
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Article Published/Sorted/Amended on Scopulus 2008-06-03 23:14:39 in Tax Articles