What is a business expense?

words: Jonathan Russell

This may sound a silly question but it is not an unusual one. There are common mistakes that people in business make, often out of simple innocence and a failure to understand basic principles. There are very simple mistakes made from purely common language.

I have seen examples of people trading as sole traders (and partnerships) where they have shown the weekly money they draw as a business expense. Their thought is that they have weekly wages and by very nature wages are business expense – if you don’t understand the problem then this article is too short to explain the issue.

However, frequently people do require guidance and I like to explain things simply and have some simple starting points:

• Have you only incurred the expense because you were in business – in that case it is probably a business expense.
• Would you have had the expense even if you weren’t in business – in that case it probably isn’t a business expense.
• If you were an employee and you incurred the same expense would you expect your employer to reimburse you? If yes then that’s probably a business expense.

You will appreciate that there are then expenses which fall in the middle, and also even a genuine business expense may not be tax deductible (as with entertaining). The most common area which falls in the middle is the use of a car where some of the use might be personal and some for business.

If you operate on a strict mileage log then the business mileage cost can be calculated either by using agreed mileage rates or a proportion of actual costs. However, the choice of car may well have personal factors involved and HMRC’s basic rule is that any expense which has a dual purpose is in the first instance private.

We do have expenses, which definitely have dual purpose but it would be unreasonable not to allow the expense. A good example here is subsistence when away on business – you have a personal need to eat irrespective of being in business so basic thought would be that it cannot be an expense of the business.

Generally therefore it comes to what is reasonable – if you are only away for a single meal it would be reasonable for you to provide that yourself (as one might take sandwiches to work as an employee); likewise if you are always near home there would be no need to eat elsewhere but if you are staying away then your options are limited and you are incurring a cost which if you were near home you would not.

So, like many things in life it is about the story – if the story makes sense and is reasonable then it is probably correct; if on the other hand the story is not sensible and reasonable then it probably isn’t.

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