6 tax deductions for savvy small business owners6 Aug 2016
Types of allowable expenses and deductions
Every business owner has an obligation to ensure they pay the correct amount of tax to HM Revenue & Customs, but that doesn’t mean they should ignore legitimate tax breaks or fail to account for deductible business expenses.
Provided an expense is incurred ‘wholly, exclusively and necessarily’ in the course of running a business, and it doesn’t have a duality of purpose (ie it doesn’t have both a business and a personal purpose) then it is usually tax deductible.
Here are just six of the many ways our London accountants are helping savvy small business owners make sure their business is as tax-efficient as possible.
1. Home office expenses
Small business owners who regularly work from a home office can claim a small tax deduction of £4 a week without having to provide itemized bills, receipts and other documentation.
If a director’s home office costs are rather more significant than this then larger deductions can be claimed, provided the business element of any variable expenses can be clearly defined and separated out (for example, by calculating what proportion of the property is dedicated to business use and how many hours the room is used for business purposes, and then adjusting energy, water and other utility costs in line with that ratio).
However, for directors of limited companies any fixed expenses (those that would remain unchanged if the director wasn’t working from home, e.g. rent, mortgage interest, council tax) cannot be claimed as a tax deduction.
In addition, if the director owns his or her own home, and has set aside an office or other room that is used exclusively for business purposes, then the director could lose his or her entitlement to Private Residence Relief on that portion of the property, resulting in a potential Capital Gains Tax bill when the property is sold.
What's it worth? For a typical small business in London the £4 a week home office allowance represents a tax saving of £41.60 a year.
2. Telephone expenses
Home landline: If a small business owners uses the landline phone in his or her home to make business calls then the cost of those specific calls are tax deductible. Any other charges, including the cost of line rental for the landline, cannot be claimed.
Office landline: Unlike home phones, the cost of a landline phone at the business owner’s normal place of work is usually fully tax-deductible, provided the bills are issued to the company rather than the business owner.
Mobile phone: If a mobile phone contract is in the company’s name, and any personal use is kept to a ‘reasonable’ minimum, then the full cost of the phone contract is tax deductible.
Broadband: If the broadband account is in the company name and any private use is not significant then the broadband fees are fully tax deductible.
What's it worth? A typical small business in London could benefit from tax savings of £120 a year by ensuring mobile phone and broadband contracts are in the company’s name (based on a monthly broadband fee of £30 and mobile phone costs of £20 a month).
3. Plant and machinery costs
Small business owners can deduct the cost of ‘plant and machinery’ equipment, including computing, manufacturing and office equipment (e.g. computers, printers, scanners, fax machines, computer software, office desks and chairs) prior to calculating the company’s Corporation Tax bill, provided the equipment is purchased in the company name and invoices and receipts are retained to prove this.
The business can claim these deductions under its Annual Investment Allowance, which currently allows up to £200,000 of plant and machinery deductions each year.
What's it worth? It’s fair to say that a typical small business in London is unlikely to get very close to fully utilising its £200,000 Annual Investment Allowance! A more realistic tax saving would be a one off sum of £320 (based on the cost of buying a MacBook with a printer and a range of business software).
4. Travel, Subsistence and IOEs
If your small business owns or rents an office, co-working space, studio, workshop or factory, then your commute to and from this ‘normal place of work’ is not tax deductible.
However, any business travel outside your normal commute, such as journeys to client meetings, travel to conferences or professional development workshops, or trips to meet with suppliers or interview new hires, are usually tax-deductible. As such, small business owners can deduct the following travel expenses before calculating their Corporation Tax bill, provided the expenses were entirely business-related:
- Air, ferry, train, tube, coach, bus and taxi fares (Including Uber, provided you get a receipt or use an Uber Business account)
- Car hire, car parking, road tolls and the London congestion charge
- Subsistence expenses when you’re away from your normal place of work
- Hotels and overnight subsistence expenses if you have to stay away from home for a business trip (provided you don’t extend your stay to include leisure time or invite your spouse along, which would introduce a duality of purpose and therefore make the stay invalid as a tax deduction)
- Incidental Overnight Expenses (IOEs): for overnight stays in the UK £5 can be deducted for Incidental Overnight Expenses, such as laundry and dry cleaning, newspapers, phone calls and wifi charges. The IOE allowance increases to £10 a night if the taxpayer is overseas.
What's it worth? For a typical SME in London these tax deductions could represent a tax saving of around £480 per year (based on two offsite client meetings in London per week with subsistence expenses, plus one overnight short-haul business trip each year with subsistence expenses and Incidental Overnight Expenses).
5. Business Mileage expenses
When a small business owner uses a privately-owned vehicle for business travel he or she can claim a specific amount per mile as a tax-deductible expense. The main exception is the commute to a ‘normal place of work’, which is again excluded from this tax break.
For the current 2016/17 tax year business mileage allowance is calculated at a rate of 45p per mile for cars and vans, 24p per mile for motorbikes and 20p a mile for push bikes. The rate for cars and vans drops to 25p a mile for any mileage over 10,000 miles, while the allowance for motorbikes and bicycles remains the same.
It’s worth pointing out that any fines (e.g. speeding fines or parking fines) are not tax deductible, so drive carefully!
What's it worth? According to the BBC average business mileage stands at 700 miles a year in the UK, which would represent a tax saving of £315 a year if a small business owner used a car or van for this travel.
6. Magazine subscriptions, professional journals and business books
Provided a book, magazine or journal is relevant to a business’s trading activities then the cost is usually tax deductible. For example, a marketing consultancy could deduct the cost of buying Permission Marketing by Seth Godin, receiving a weekly copy of Marketing Week and subscribing to the Journal of Marketing, but is unlikely to get away with deducting the cost of a subscription to Playboy or Top Gear magazine (unless the company has clients in the adult entertainment or automotive industry, of course!).
What's it worth? Many small business owners fail to claim tax deductions for business books, magazines and journals, but they could represent a tax saving of around £80 a year for a typical SME in London (based on one weekly magazine subscription and the purchase of 10 business books each year). If you need help or advice on ensuring you understand what's permitted or not in terms of deductible expenditure for tax get in contact with us. We would also love to talk to you about our efficient, online accounting, tax, payroll and vat services.