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There’s no doubt that when you’re running a business, tax can be confusing. In brief, HMRC rules stipulate that some running costs – known as allowable expenses – can be deducted when calculating your taxable profit. Say you are self-employed, and your business turnover is £40,000 for the tax year. If you deduct £10,000 from that for allowable expenses, you will pay tax on the £30,000 that remains.

If you use money in your business account to pay for personal items or services, these cannot be deducted. In other words, they are not allowable expenses. The rules also differ for those who run limited companies. In this case, costs can be deducted from profit before tax, but if an item (such as a mobile phone) is also used for personal purposes, then it must be treated as a company benefit.

Allowable expenses

Costs treated by HMRC as allowable expenses include office costs, and this may include phone bills as well as costs like travel, staff, uniforms, premises, marketing, training, financial costs and items bought for selling on. If you use HMRC’s £1,000 “trading allowance” that is tax-free, you cannot claim expenses. Anyone who is uncertain can consult the Self Assessment Helpline or seek advice from a qualified and experienced accountant.

Capital allowances

Those who use traditional accounting may be able to claim a capital allowance whenever they make a large purchase for business purposes. Examples include vehicles, equipment and machinery. If cash basis accounting is used, a car would also be treated as a capital allowance.

Items for business and personal use

If you use something for both business and personal reasons, you may claim allowable expenses for the business costs only. Say your mobile phone is used for both, and the bill is £200. If £120 was spent on business calls and £80 on personal calls, you could claim £120 for business expenses.

Working from home

Those who are home based may also be able to claim a proportion of the running costs for the likes of rent or mortgage interest, council tax, gas and electricity, and use of the phone and internet. How much is allowable depends on factors like how long you spend working from home or how many rooms are used for running the business. For example, if you work from one of six rooms in your home and your utility bill is £600, you can claim £100 – one sixth of the bill as you use one sixth of the house. Then you need to work out how many days out of seven you use the room. If this was four, you can claim £57.14 as an allowable expense: the original £100 divided by seven then multiplied by the number of days used. Alternatively, you can use simplified expenses to work this out.

Office equipment

A mobile phone for business use can thus be claimed as an allowable expense where has basis accounting is used, or a capital allowance for those who use traditional accounting. Any personal use of the phone cannot be claimed for.

Clarifying the complex

At Adaptive Accountancy, we can help to clarify complex questions around taxation, so why not get in touch with an experienced company offering accountancy services for South Yorkshire business owners?

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