Given the recent case of Dr Samadian losing his battle with HMRC over travel expenses, Liz Hudson of Smith & Williamson, the accountancy and investment management group, explains the pitfalls.
Where you are self-employed, you can only claim the entire cost of a business expense if it is incurred 'wholly and exclusively for the purpose of the trade' and if the expense is of a 'revenue' nature, rather than a 'capital' purchase. Allowable costs would include, for example, hiring a theatre or paying an anaesthetist.
However, if expenditure relating to your self-employment is for both private and business use, you cannot claim a deduction unless you can separate the business element. For example, a suit to wear for business purposes is seen as having a dual purpose, even if you only use it at work, and would not be deductible, whereas a theatre gown would be deductible.
Travel costs from home to work are not an allowable expense. However, if home is also your base of operations, the position is complex.
The recent case of Dr Samadian could be a landmark decision in the interpretation of 'wholly and exclusively' business expenditure. Whilst Dr Samadian argued that he had a dedicated office in his home for his private practice, HMRC did not accept the home office could be a starting point for calculating private practice business mileage. Neither did journeys between NHS and private hospitals qualify. Nevertheless, we conclude that HMRC will generally accept a deduction for travel between private hospitals and other private practice destinations, and for emergency call outs starting at home travelling to non-habitual places.
The following outlines the position for some common expenses.
|
Expenditure |
Deductible |
Note |
|
Trade and professional subscriptions |
✔ |
|
|
Travel expenses for business mileage (fixed rate per mile or actual business travel expenses based on proportion of business out of total mileage) |
✔ |
See comments above |
|
Bank interest and charges (on business account) |
✔ |
|
|
Administrative costs, such as stationery, postage, telephone |
✔ |
|
|
Training costs |
✔ |
Allowable where training relates to updating existing expertise rather than acquisition of substantial new skills |
|
Entertaining clients and associated costs |
✖ |
|
|
Legal and professional expenses |
✔ |
Not allowable if related to capital or non-trading items |
|
General clothing |
✖ |
|
|
Food |
✖ |
Subsistence costs whilst on business trips may be allowable |
Acquisition of capital items
When purchasing capital items, such as a computer, for business purposes, you generally cannot claim an outright expense but can claim tax relief via capital allowances. Most relevant will be the annual investment allowance which is worth £250,000pa on a pro-rated basis from 1 January 2013. The rate is due to fall to £25,000pa on 1 January 2015 so this could be an appropriate time to acquire expensive equipment tax efficiently. Most business assets qualify, however, cars, land and buildings are excluded.
Working from your home
If you work from home, you can claim a deduction for part of your home expenses; however, this can affect the capital gains tax position on the sale of your home.
Expenses relating to employment
Few expenses relating to employment are tax deductible. Usually the costs for subscriptions and business mileage qualify, however, the expenses must be incurred 'wholly, exclusively and necessarily in the performance of the duties of the employment'. In limited circumstances, the costs of training may also be deductible.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
