10 Business Expenses that are not Tax Deductible
Arriving to deliver a sales pitch, you park up outside a prospect’s office. However, the pitch overruns, and you return to the car to find a ticket on the windscreen.
Unfortunately, such fines are non-deductible: this includes those incurred exclusively in the course of your business and that “couldn’t be helped”. The general rule for business expenses looks like this: so long as an expense is incurred ‘wholly, necessarily and exclusively’ for the purposes of running a business, then it’s deductible when calculating profits for tax purposes.
So far, so simple; but when it comes to the specifics of what is and isn’t allowable for limited company tax purposes, never underestimate the HMRC’s readiness to depart from common sense concerning the realities of running a business - not to mention the taxman’s seemingly never-ending quest to shut the door on entirely legitimate expense claims.
Here’s a rundown of some of the items which logic might suggest would be deductible, but where the rules say otherwise...
For many of us, (accountants in North London included), building relationships with new and existing clients is a massive part of what we do. And yet, despite the fact that it’s often crucial to business success, client entertainment is not an allowable deduction - either for limited company tax or for Income Tax if you’re a sole trader.
For tax-efficient marketing, instead of something that’s purely entertainment-based (a drinks and curry night, for example), you might want to think along the lines of a seminar or presentation at a venue, followed by refreshments. This is much more likely to be viewed as a legitimate marketing expense.
Your corporate stadium box
The treatment of match tickets and corporate stadium boxes depends on what you are using them for.
Let’s say you are giving away a pair of tickets as a competition prize for publicity/promotional purposes. In this case, the cost should be allowed as a deduction from trading profits for limited company tax return purposes. Likewise, you might make tickets available as an incentive for a buyer who meets a particular level of purchases, in which case it is effectively a discount on sales - making it allowable as a normal expense of trade.
If the seats are for straightforward client entertainment however, the cost is disallowed as a tax deduction. If an employee attends as a perk or reward, it forms part of their salary for income tax purposes. This means that where a staff member is attending the match on one of the firm’s season tickets, the value of the benefit needs to be calculated as a proportion of the overall season ticket cost.
In the case of protective clothing and uniforms, it’s generally pretty clear that such expenses were incurred wholly, necessarily and exclusively in connection with the business.
So let’s say your line of work demands professional attire. Given that your suits were bought exclusively for work - and are never worn outside of it, surely the cost is deductible for tax purposes?
Unfortunately not. The leading authority on this is the case of Mallalieu v Drummond  in which a barrister claimed the cost of replacing and laundering her court clothes against tax, given that professional requirements demanded adherence to a certain dress code. The court disagreed, stating that although the cost of the wig and gown is deductible, the same does not apply to other items (e.g. a suit). This is because such items might suitably be worn as part of a hypothetical person’s ‘everyday’ wardrobe.
Travel to the office
The cost of travel conducted in the course of business (e.g. journeys to customer premises, suppliers and trips between your various branch offices) can usually be classed as a deductible expense.
However, travel costs between home and the business are non-allowable. If you provide your employees with season tickets for ordinary commuting journeys, these are regarded as benefits that have to be accounted for as earnings.
For many of us, childcare is one of the most significant and obvious costs incurred in connection with running a business. Despite this, childcare is not classed as a direct business expense, and therefore cannot be included as a deductible expense on your tax return.
Instead, we have the government’s current Tax-free Childcare Initiative, whereby for every 80p an eligible working parent puts into a designated online account, the government will top it up by an extra 20p. It’s essentially a roundabout (and some would say, needlessly complex) way of refunding parents’ basic-rate tax on childcare.
Non-essential improvements to your business premises
The cost of necessary repairs and changes to capital assets is deductible. Examples include rewiring, plumbing and other routine maintenance and repair work to your business premises, or adaptations to plant and equipment to comply with health and safety guidelines.
The cost of property improvements is generally non-deductible. So you might feel that your office could benefit from a cosmetic refurbishment, but HMRC will only deem it to be deductible if the work is shown to be necessary for your business to operate.
Certain professional fees
Legal fees connected with the purchase of property and other capital assets are non-deductible (although these can be claimed as part of your capital allowances). While the fees incurred for the preparation and submission of accounts are deductible, the same doesn’t apply to legal costs connected with disputes with HMRC.
If you are looking to update your skillset, be careful not to make false assumptions about tax relief on the cost of training.
Training expenses are deductible only where the training is wholly for business purposes. Examples include continuing professional development update courses and training to help you get to grips with running the business (e.g. business finance management and company secretarial skills).
Where the training is in areas that appear to be removed from your existing line of business, it reduces the likelihood of relief applying. Take the example of a floor fitter: the cost of training and accreditation linked to a particular specialist flooring material ought to be tax-deductible. But if the training is to provide entirely new knowledge and skills, (in plumbing, for instance), the relief is unlikely to apply.
The cost of employee entertaining is an allowable expense for Corporation Tax purposes - but you have to be very careful not to go over the exemption limits.
For the tax exemption to apply, it has to be an annual social function, it has to be open to all employees, and the cost must not exceed £150 per attendee inclusive of VAT. Multiple annual events are exempt, so long as the combined cost per year does not exceed £150 per head.
Be aware that the £150 limit is an exemption rather than an allowance, which means that if you go a penny over, the full amount becomes taxable.
Finding the best structure for your business
The question of what is and isn’t deductible can certainly be a difficult one to get to grips with. Fortunately, our expert tax return services are here to help you make the most of all allowable deductions and exemptions.
At the same time, it’s worth remembering that even if a necessary business expense is non-deductible for tax purposes, it’s still a business expense. Often, incurring the cost through a company is far preferable to adding it to your list of personal expenses: just one of the reasons why limited company formation can make sound business sense. To discover the best structure for your business speak to MJH Accountants today.