At a glance
- Following the rise in corporation tax for some firms in April 2023, it’s all the more important to understand which business expenses are tax deductible. But it can be confusing.
- There are tax incentives for businesses to invest in research and development (R&D), as well as allowances to invest in capital expenses such as equipment or machinery.
- Practical information and expert advice can help you make sense of expenses and tax reliefs available to your business.
As a start-up, knowing what expenses can be tax-deductible will help boost your cash flow significantly. Plus, with the corporation tax rate increasing for some firms – to as much as 25% – many business owners will be looking for legitimate ways of reducing their taxable profits.
But there are many common misconceptions around how reliefs work and the rules are often complicated, so calculating how much to claim can be difficult.
For instance, some SME owners don’t realise that deductions only apply to certain business costs, and there are many that are not eligible for tax relief, such as client entertainment. Entrepreneurs may also miss the chance to save many thousands in other reliefs due to lack of awareness.
Andy Gibbs, Head of Group Technical at TaxAssist Accountants, says: “Some tax-deductible expenses are all too easy to overlook. Entrepreneurs often forget to claim all they’re entitled to when the expense doesn’t jump out at them from a bank statement. But finances can often be tight in the early years of a business, so advice and planning can help you save.”
Pension contributions for yourself and for members of staff are a tax-deductible expense for your business. And with the annual tax-free allowance on pensions savings increasing to £60,000 following the Spring Budget, you can save more for your future in a tax-efficient way.
Here are some more examples of tax-deductible expenses for start-ups that have common misunderstandings around them. The below applies to tax reliefs for limited companies – the rules for sole traders differ in some areas.
Working from home
Many entrepreneurs run their business from their house, especially during the early days. So many wonder, “Can I claim tax relief if I work from home?”
The answer is that if you have no other office, you can claim part of the running costs of your home on expenses, thereby saving tax. Even if your business moves to a commercial property later, if you continue doing some work from home, you may be able to claim some reliefs.
Your limited company can pay you HMRC’s flat-rate allowance – currently £6 per week or £26 per month – or you can claim proportional expenses. Unlike the rules for sole traders, these can only be incremental costs (gas, electricity and metered water), and do not include fixed costs that you’d pay whether or not you worked from home, such as mortgage interest rates, rent or council tax.
HMRC offers guidance in this area, but it can be complex, so take advice from a tax professional to help you maximise your entitlement.
Research and development
R&D tax credits are a rich but vastly underused source of government support. This is largely due to low awareness and doubts over eligibility. SME owners wondering if they qualify for R&D tax credits often assume that they only apply to hi-tech industries, but claims are common in a range of business areas, from construction to agriculture. The key test is that the R&D project must attempt to make a scientific or technological advance.
R&D tax relief can boost your cash flow significantly by allowing you to claim a proportion of any R&D costs incurred in your first year as a cash tax credit. You don’t have to be profitable to receive the benefit. Your claim could run into tens of thousands – money that could help you face other challenges, such as rising supply costs and staff recruitment and retention.
Andy says that R&D tax credits can be attractive, but start-up owners should be aware that HMRC capped the available relief in April 2021. An adviser can help you claim the right amount.
Tax rules around capital spending sometimes create confusion because they differ from accounting rules. Businesses that spend money on capital items, such as machinery or business vehicles, can claim the full or part of cash cost of these items as expenses for tax purposes.
Following changes announced in the 2023 Spring Budget, the types of Capital Allowance available for businesses to claim include ‘full expensing’, whereby companies can claim 100% relief in the first year on qualifying items bought between 1 April 2023 and 31 March 2026. There is also the 50% first-year allowance for purchases of new special-rate (including long life) assets until 31 March 2026.
The rules around Capital Allowances, and which items qualify, can be confusing, so it’s important to seek professional advice.
Tax relief is available on most travel expenses, except travel from home to your workplace. But the technicalities of how to claim travel-related relief are often misunderstood.
The cost of a train ticket to meet a client or supplier is a simple deductible expense. But if you use your own vehicle, you have to make a travel claim using the Mileage Allowance Payments set by HMRC. You must use these rates regardless of how much the actual fuel for the journey cost.
As it can be difficult for start-ups to qualify for financing, some entrepreneurs use a personal loan or credit card and invest those funds into the business.
If you do this, the interest payments will likely be a tax-deductible expense for you, the owner – not the business. This relief is often overlooked and the details can be complicated. Getting professional advice is essential.
Need help with your tax-deductible expenses? Contact us for practical information and advice to ensure you’re making use of the reliefs available.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.
Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.
Information in this article does not constitute advice.
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SJP Approved 08/08/2023