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 and tries to set a clear path as to what can and cannot be claimed as a business expense.
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. To help you steer clear of this grey area and avoid HMRC fines and penalties, we’ve listed eight of the most common non-tax-deductible expenses that are often included in 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. This may come as a surprise however, the HMRC sees anything that you can discuss over lunch or dinner can be discussed at your office with a glass of water. It is therefore seen as not a reasonable deduction.
You are of course entitled to claim on the entertainment of 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 to a supplier, client or charity. If they don’t have the facilities to provide you with a receipt and you include it in the books 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. The HMRC may then investigate such transactions further, which could have potential legal consequences.
4. Customer and staff gifts
The general rule is that business gifts or gifts for customers are in fact a non-deductible expense and are treated by the HMRC as falling under the same rule as entertaining.
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 advert for the business and is not food, drink, tobacco or exchangeable vouchers. The HMRC will consider staff gifts a deductible tax if it is a trivial benefit. This means it must cost less than £50 and not be part of the employment contract or a reward for performance. Seasonal gifts such as chocolates or a bottle of wine are therefore likely to be exempt.
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 which are similar to those of Gift Aid.
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 on. However, renovations to improve the entrance to the building, which may result in structural changes is a non-deductible tax expense, as it is deemed by the HMRC as unnecessary for the operation of your business.
7. Legal fees
Some legal fees are deductible while others are not, which makes it 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 for the legal costs associated with share capital or capital items such as the buying of a property and machinery.
8. Fines and penalties
Breaching regulations or a 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.
Need help keeping tabs on all your expenses and figuring out what is tax deductible and what isn’t? Get in touch with us today to get specialist advice from our tax accountants in Salford (Media City) or Manchester City Centre.