Six Expenses You Thought Were Deductible But Aren’t
Author: Russell SmithJuly 31, 2012
Filling out your tax as a self-employed worker? Make sure you don’t try to claim these as expenses.
Deductibles are a vital part of being a sole trader, as they can help to offset large costs and level the playing field between yourself and other workers. Those who work on the behalf of a business don’t have to pay for things like their supplies and equipment, so why should you be penalised for trying to start something of your own?
While there are plenty of surprising things you can claim as deductible, there are also plenty of other things you may think are acceptable expenses to claim on, but actually aren’t. In this blog, you’ll get some tax advice for the self employed, as I run through six common expenses you thought were deductible, but aren’t.
1. Entertaining Clients
At Russell Smith Chartered Accountants, we often go through the list of deductible and nondeductible tax expenses for self-employed workers. The topic that always generates the most debate is client entertaining — can I take a client out to dinner? — is this tax deductible?
For us, and HMRC, there is no debate.
If you are are a client of mine, I can take you out to dinner and put the cost on the RSCA accounts, but it cannot be deducted for tax. This generally surprises people, as entertainment seems like a necessary part of building business relationships, yet HMRC is very clear on this matter. Anything you can discuss over dinner can be discussed over a boardroom table, therefore, it’s not a reasonable deduction.
2. Lavish Conference and Meetings
The costs of conferencing, business travel, client meetings, etc are all acceptable and reasonable expenses to claim on tax for self-employed individuals. However, this is the case only to the point that it remains reasonable.
An example of this would be an international business meeting. Instead of flying Australian client into your Leeds based office, putting them up in a reasonable local hotel, you fly both of you out to a luxurious penthouse in Dubai.
While you might argue you are meeting halfway, HMRC will see this as a lavish and unnecessary expense which could have been done at a more acceptable price. Therefore, they will not allow you to claim all of the price as an expense — although they may allow for some.
3. Life Insurance Premium
The reason that life insurance premiums are not deductible expenses is fairly straightforward. If the insurance is put in place to protect the business, and therefore any payout would be paid directly to the business in the event of employee death, then the premium would be untaxed. Therefore, as it is not taxable, it is also not deductible.
4. Unrecorded Cash Transactions
Every now and then, it is likely that’ll you’ll use cash to make a transaction on the behalf of your business. It could be to a supplier, to a client or even a charitable donation. They don’t have the facilities to give you a receipt, so you write the number down and record it in the books; after all, it’s a legitimate expense.
The issue here lies in a lack of evidence for HMRC. If they choose to look into your accounts and discover that you’ve claimed for an expense that doesn’t match the outgoings of your business account, nor have any supporting evidence, this will be viewed as a discrepancy that requires further investigation with potential legal consequences.
5. Childcare Costs
This one is the cause of a lot of controversy, yet it is still a non-deductible expense. Childcare costs, whether nanny or daycare, are not deductible, which may come as a surprise to any self-employed individuals.
As HMRC sees it, it is not directly related to the operation of your business, so it is not a necessary expense. For those with children, this can be frustrating, but unfortunately, there is no getting around it.
It’s a scene we are all familiar with. Sat in a coffee shop tapping away at the laptop, firing off work e-mails or writing a client report. You need to get this work done, but you need to buy a coffee to sit down and use the wifi, so you keep the receipt and call it a business expense.
While you may claim coffee is a basic requirement of operating your business — as without it you’d be a yawning, hunched over shell of your former self — and therefore an acceptable tax expense for self-employed workers, HMRC aren’t going to see it that way. Avoid.