8 surprising non-tax-deductible expense claims that are often included in expense claims

At Alexander & Co, we are dedicated to helping professionals and businesses with their taxes. We’ve worked with a variety of individuals across other business sectors and can provide a range of specialist advice and support. If you’re wondering about tax-deductible expenses, keep reading to learn more in this helpful guide.

In the UK, tax-deductible expenses are often included in expense claims, but sometimes these are overclaimed. The definition of a non-tax-deductible expense is an expenditure that does not exclusively facilitate the normal operation of your business. The HMRC has a long list of allowable expenses for a limited company or self-employed worker. For example, if you’re looking to claim R&D tax credits, this would be an allowable deduction.

However, one of the most frequent questions we receive is, “Should I pay tax on my expenses?”. There are a number of grey areas relating to allowable expenses for self-employed workers and limited company owners that can cause confusion. Read on to find out more about the most common non-tax-deductible expenses that are often included in HMRC expense claims. 

1. Entertainment for clients

Client entertainment may seem like a necessary part of building long-lasting business relationships or central to expanding your client base. Claiming expenses through HMRC for client entertainment is seen as a non-reasonable deduction.

You are of course entitled to claim entertainment for your employees, such as the end-of-year Christmas party. You can hold annual tax-free social functions of up to £150 per head per director or staff member, including their partners.

2. Childcare costs

Perhaps one of the most controversial non-tax-deductible expenses is childcare. The HMRC does not class childcare as a direct business expense and is therefore non-deductible.

For self-employed individuals, this can be frustrating and may come as a surprise as they may argue it directly affects the operation of their business, however, the HMRC does not currently consider this expense to be necessary.

3. Unrecorded cash transactions

The most dangerous non-deductible expenses, which are often claimed for, are cash transactions. There are times when you may make a cash transaction on behalf of your business with a supplier, client or charity. If they don’t have the facilities to provide you with a receipt to include in your tax accounts as a legitimate expense, you may be putting yourself in danger.

Should the HMRC decide to look into your accounts and find that you’ve claimed for an expense that doesn’t match the outgoings of your business account or have limited supporting evidence for the transaction, this can be viewed as a discrepancy. One way to avoid this is to ensure you’re working with a tax accountant who can provide you with guidance on cash transactions and keep your accounts up to date.

4. Customer and staff gifts

Business gifts or gifts for customers are non-deductible expenses and fall under the same rule as entertaining, according to HMRC.

Business gifts to customers are allowed as a tax deduction, if the total to one individual per year is less than £50, bears a conspicuous advertisement for the business, and is not food, drink, tobacco or exchangeable vouchers. The HMRC will consider staff gifts a deductible tax if they have a trivial benefit.

5. Charitable donations

If a donation is made via Gift Aid, then it is a tax-deductible expense. Gift Aid is only offered to registered, government-approved charities. This stops businesses from being able to offset costs through privately owned non-profit organisations. 

A cash donation by an individual to a charity is a non-deductible expense as it is not wholly or exclusively made for the purpose of the business. However, a company can obtain tax relief on a cash donation as a deduction from profits if it meets certain conditions that are similar to those of Gift Aid.

6. Assets

Depreciation of assets is an unavoidable part of a business and is not a tax-deductible expense. The perceived losses from buildings, vehicles, equipment, and technology should not be included in your tax return.

However, when it comes to making improvements to capital assets such as properties, it gets a bit more complicated as to what is and isn’t tax deductible. Necessary repairs, such as structural, plumbing or electrical issues, can be claimed. However, renovations to improve the entrance to the building, which may result in structural changes, are a non-deductible tax expense, as they are deemed by the HMRC as unnecessary for the operation of your business.

To find out more about allowable deductions for capital gains, including tax on property in the UK, make sure to get in touch with our capital gains tax advisors.

7. Legal fees

Some legal fees are deductible while others are not, which makes them one of the more complicated business expenses. You can claim costs for professional indemnity insurance premiums as well as the hiring of accountants, solicitors, surveyors, and architects for business reasons such as patents and registering trademarks.

However, you cannot claim tax-deductible expenses for legal costs associated with share capital or capital items such as the purchase of property and machinery.

8. Fines and penalties

Breaching regulations or prosecution as a result of a breach of regulations are non-tax-deductible expenses. The reasoning behind the repayments being non-deductible is down to the simple reason that your company should be following the rules. Therefore, the HMRC considers breaking any rules or regulations as not a necessary part of your business operations. Interestingly, payments for damages that are compensatory and not punitive are in fact tax-deductible.

Get help from Alexander & Co tax accountants

If you’re looking to claim expenses for your tax accounts, the best thing you can do is work directly with a professional who can ensure you avoid mistakes and subsequent penalties. At Alexander & Co, we have a team of dedicated tax advisors who can help with your tax-deductible expenses. 

To get the best tax advice from our team, get in touch with us today to get specialist advice from our tax accountants in London or Manchester City Centre.