Under current legislation, you can claim a deduction for any expenditure incurred Wholly and Exclusively (W&E) for business purposes. Whilst the vast majority of expenditure will be allowed as a deduction against your income as long as it satisfies the W&E test, there are, as you would expect, certain specific exceptions. The main costs you are likely to incur relate to stock, business premises, employee costs and administrative costs. Taking each of these in turn you should be aware of the following. Stock All stock that you purchase for resale will be allowable as a deduction against the income received by the business. However, there is an accountancy principle that states you must match your income with expenditure and so you will need to adjust the stock purchased during the year to reflect the opening and closing stock to arrive at a figure for the cost of goods sold. For e.g. Opening stock brought forward
If you rent or purchase business premises, the costs associated with the premises will be an allowable deduction against the income of the business. You will not, however, be able to claim for the purchase costs of the building as this is deemed to be capital expenditure. For e.g Repairs vs improvements
Employee costs Where you have to take on an employee to work in your business, the costs associated with this expenditure will be allowed as a deduction against income. However, where the employee is your spouse or a family member HMRC will want to look at the position a little more closely. The main factors that HMRC will want to consider are:
- Does the family member actually carry out any work for the business?
- Are the wages claimed commensurate with the duties performed?
- Were the wages actually paid to the employee during the year?
If you can answer yes to all three of these questions then normally there should be no problem in claiming a deduction.
Cash Basis The Government wants to make it easier for the smallest businesses to calculate their taxable income, whether self-employed sole traders or those in partnership with other individuals, as well as providing them with more certainty over their tax affairs.
The cash basis allows businesses that do not need or want to prepare accruals accounts for business purposes. Small businesses using the alternative cash basis will be taxed on their actual receipts less payments of allowable expenses made in the period, rather than being asked to spend their time doing accounting adjustments and other calculations designed for larger or more complex businesses.
If businesses opt into the cash basis and sustain losses, these can only be carried forward to set against the profits of future years but not carried back or set off ‘sideways’ against other sources of income.