Deductible business expenses

16 August 2022

The key rule of deductible business expenses is that they must be incurred wholly and exclusively for the purpose of that business.

advice : Tax

A deduction for businesses is available if expenses are incurred wholly and exclusively for the trade, profession or vocation. Opposite to the employment expenses, there is no requirement that the expense is ‘necessarily’ incurred and as long as an expense is incurred for the purposes of the business, a deduction is given. 

It is essential to keep good records of your business expenses – that helps deductible expenses to be noticeable.

Private expenses

A deduction is not available for private expenditure and no private items be recorded through the business. The best practice is to keep private and business expenditures separate and use different bank accounts. If your business is a limited company, then it should have its own bank account.

Mixed-use expenses

If your expense was incurred for both, business and private purposes, then you might be able to deduct the private element (only if it can be identified). For example, if you use a phone for personal and business calls. The allocation must be just and if any dual purposes occur, then that expense should not be deducted (for example work clothes).

Are drawings deductible?

If you operate as a sole trader or other unincorporated business, and you pay yourself a salary or take drawings from the business, then you can’t deduct these expenses when compiling your profit. However, if you operate as a personal or family company, you can deduct a salary that you pay yourself as well as any employer’s National Insurance and employer pension contributions.

Capital expenditure

Capital expenditure can only be deducted in computing profits if you use the cash basis, and the expenditure can be deducted under the cash basis capital expenditure rules. You cannot deduct capital expenditure if you prepare accounts on an accrual basis.

Common deductible expenses

The actual expenses that are eligible for deduction will vary from business to business. The key rule that applies is that they are incurred wholly and exclusively for the purpose of the business. However, below you can see some of the common deductible business expenses:

  1. Cost of goods sold (such as raw materials and goods brought for resale);
  2. Distribution and packaging costs;
  3. Office expenses (such as stationery and phone bills);
  4. Travel and subsistence expenses (such as fuel parking and hotel bills for overnight business trips);
  5. Motor expenses (such as car insurance and repairs);
  6. Staff costs (such as wages, salaries, employer’s National Insurance and pension costs);
  7. Rent and rates;
  8. Gas, electricity and water bills;
  9. Advertising and promotion costs;
  10. Bank interest and other finance costs;
  11. Accountancy, legal and other professional costs;
  12. Uniforms (but not general clothing even if only worn for work).

Non-deductible expenses

A deduction for certain expenses is distinctly prohibited. Those expenses include the cost of business entertainment, which if deducted in computing accounting profit must be added back to arrive at a taxable profit. Likewise, depreciation is not deductible in arriving at a taxable profit and instead a relief is given in the form of capital allowances.

Nothing on this page is intended to be or should be construed or taken as accountancy, investment, tax or any other kind of advice. We recommend individuals and companies seek professional advice on their circumstances and matters.