You know the sort I mean, “Oh I pay hardly any tax. It’s because I claim for absolutely everything. Do you know the taxman paid for my holiday last year?” What a load of rubbish! Your bar stool buddy may have paid for his holiday from his business account, but, if his accountant is doing his job, he won’t have claimed a tax deduction for it.
SO WHAT EXPENDITURE IS TAX DEDUCTIBLE?
There is a misconception by business people that if they say a particular expense is for business purposes then it’s an allowable tax deduction. Well I can tell you it’s not, because the test of allowability is objective not subjective. What does this mean? Well for a business deduction to be allowable it must be incurred “wholly and exclusively” for the purpose of the business. The courts have had many cases before them where the taxman has argued that a particular expense is not tax deductible because it fails the above test.
IF THE EXPENDITURE HAS A DUAL PURPOSE IT IS NOT TAX DEDUCTIBLE
For an expense to be tax deductible its’ purpose must be quite clearly identifiable as wholly and exclusively for the business. In other words it cannot be part of an expense, some of which is personal and some of which is business, but you can’t tell which because of this dual purpose. For example if I buy a suit which I can wear both to work and to private social events how can I tell which part of the cost relates to business and which to non business use? Any division is arbitrary so none of the expenditure is allowable because it is not wholly and exclusively for the purpose of the business. Supposing, however, I had an RWA logo embroidered on the jacket of my suit. It’s now quite clear that I have purchased the suit to advertise my business and it therefore becomes a business expense.
TWO CONTRASTING EXAMPLES
To go back to your bar stool buddy who thought he could claim a tax deduction for his holiday, take a look at these two examples. A solicitor goes on holiday with his wife to the States and while he is there he attends two conferences for lawyers. He claims a tax deduction for his share of the air fare and accommodation costs while at the conferences. An accountant also goes to the States specifically to attend a conference for accountants and then returns home immediately afterwards. Is the purpose of the Solicitor’s visit wholly and exclusively for the business? No it isn’t, it has a dual purpose, both business and personal, which cannot be clearly separated, so none of the expenditure is tax deductible. On the other hand the accountants visit was entirely for business reasons so the whole cost is tax deductible. I chose these two examples quite deliberately as they were actual court cases in which the solicitor lost to the taxman but the accountant won.
IF YOU FANCY A MEAL ON THE TAXMAN YOU MUST BE STAYING AWAY ON BUSINESS TO GET IT
Another misconception is that the cost of eating out is a tax deductible item of expenditure. If this is to entertain a customer, it may be wholly and exclusively for the purpose of the business, but there is a specific provision in law that disallows it. Eating out in general is not wholly and exclusively for business purposes because you must eat to live (the dual purpose). The cost of eating out while staying away on business however, is tax deductible because it would not have been incurred if you had not been away on business.
WHERE DO YOU FIND OUT WHETHER AN EXPENSE IS TAX DEDUCTIBLE OR NOT?
If you want to see how extensive the rules are about what is a tax deductible expense and what is not follow this link http://www.hmrc.gov.uk/manuals/bimmanual/BIM37000.htm.
Otherwise you can always ask the Really Wicked Accountant.