Monday, 21 September 2009

"When can I claim expenses?"

This is a question that often crops up. Because HM Revenue say that any expenses your business incurs must be "wholly and exclusively for the purpose of the trade", or else you can't claim tax relief on it.

So how does that work?

Let's take travel and accommodation expenses, which are a very thorny issue. (Please note this is general guidance only, and if you're not sure you should take advice about your own case and your own journey.)

For example, imagine I travel from my home in Cumbria to London, for a training day. It's a long journey and I decide to make double the use of it by staying an extra day and going to the theatre. So I've got the cost of a 2-night hotel stay and my train fare to think about.

The first point to consider is what is the purpose of the journey. Is it just for the trade (in which case it's fully allowable for tax) or is it for pleasure too?

It's for pleasure too, because when I booked the journey, I planned to go to the theatre too.

So that means there's a duality of purpose. Note that HM Revenue distinguish between purpose and benefit. If the journey is for the purpose of the trade only, and you only get incidental personal benefit from it, it counts as wholly for the trade.

For example, if you go to Morrisons to buy ingredients for your cupcake business and at the same time you buy a bar of chocolate for your son, I would say that would be only incidental personal benefit, not dual purpose - so you could claim the cost of your travel there and back, and the cost of the cupcake ingredients. You can't of course claim the cost of the chocolate bar!

If an expense has dual purpose, then the cost is not allowable for tax. It's completely disallowed.

But... if it's possible to apportion the cost between trade and non-trade, so that a definite part was for trade and a definite part for non-trade, HM Revenue do allow you to apportion cost, and claim tax relief on the "trade" bit of the cost.

So for my journey to London, I could split the hotel bill between the night I would have had to stay for the training day, and the night I chose to stay extra, and claim tax relief for one night only.

When I entered that in FreeAgent, I would put one night's cost as "Accommodation and Meals" and the other as "Drawings".

What about the train fare?

That's a difficult one. I could argue that I wouldn't have gone to London at all if it hadn't been for the training day. The primary purpose of the trip was for business, the train fare didn't cost any more because I stayed an extra day, so I would probably try and claim it.

But HM Revenue could come back with the "duality of purpose" argument and say that I planned the trip for both business and pleasure and therefore it wouldn't be allowed.

It's a grey area.

So do be prepared to argue your claim, keep all available receipts, and of course, take professional advice.

No comments:

Post a Comment

Please feel free to post your comments here.
I check all the comments before they're posted. That's not because I don't want you to have your say. It's because I don't want any obscene language or spam here. So please don't post that or it will get zapped.