“Can the business pay for this?” is one of the most frequent questions we hear from clients.
The answer sits around a key tax principle that applies to both expense claims for Income Tax and Corporation Tax purposes – an expense must be “wholly and exclusively for the purposes of the trade” to be allowable.
It sounds straightforward, yet this rule is responsible for many HMRC disputes, including a long history of tribunals.
Breaking down the rule
There are two parts to consider.
Wholly looks at how much of the expense relates to the business. If something is partly private and partly business, you cannot simply claim the full amount.
Where there is a clear and fair way to split the cost, only the business proportion should be claimed.
A typical example is using your home for work, where a reasonable share of household bills may be allowable.
Exclusively focuses on why the expense was incurred. HMRC are interested in the motive at the time the money was spent.
Even if a business benefits, that does not automatically make it tax deductible.
When personal benefit causes problems for expenses
Difficulties often arise where there is a personal element built into the expense.
Take everyday clothing. Even if you buy clothes specifically to wear to meetings, they still serve the personal purpose of keeping you warm and decent.
Because of that unavoidable private use, the cost usually fails the test. By contrast, protective gear or a clearly branded uniform is more likely to qualify because its purpose is business-specific.
Travel and food cause similar confusion. Regular meals are personal living costs, but subsistence can be allowable when you are travelling for business, as the purpose shifts from ordinary living to supporting work travel.
If an expense serves a personal purpose alongside a business one, it is usually disallowed. However, if an expense is partly for business and partly for private use (e.g., a phone bill), only the, identifiable, solely business portion is allowed.
A personal benefit that is merely incidental to a business purpose does not disqualify the expense.
Expense claims can be extremely nuanced and if there is any doubt about whether to claim it is best to seek professional advice to ensure you don’t receive a penalty or an enquiry from HMRC.
Questions to ask before claiming an expense
Before putting an expense through the books, consider:
If the expense exists because of the business and any private use can be fairly carved out, you are on firmer ground. Nevertheless, it is always better to be safe rather than sorry by getting advice.
Why careful treatment matters
Incorrect claims can lead to extra tax, penalties and unwanted HMRC attention. Good record-keeping and a clear understanding of why costs are incurred will put you in a much stronger position.
When in doubt, it is far better to check first than to correct things later. If you need guidance on business expenses, our team are here and happy to help.
