The costs paid with the sole purpose of earning business profits are known as allowable business expenses. These costs do not include money paid for non-business uses or for personal purposes. Common allowable expenses can include cost of stock, premises costs, payroll costs, repairs, motor and travel expenses, finance costs, administration costs and professional fees.
A business expense is usually allowable if it meets the following conditions:
- The expense is not capital expenditure
- The expense is not specifically non-allowable
- The expense is wholly and exclusively for business purposes
Examples of allowable expenses related to accountancy, legal and other professional fees are accountants, solicitors, surveyors, architects and other professional indemnity insurance premiums. Examples of non-allowable expenses are legal costs of buying property and large items of equipment. Additionally, the costs of settling tax disputes and fines for breaking the law are non-allowable.
Sometimes expenditure is incurred for both business and private purposes. Expenditure for mixed private and business purpose is non-allowable expenditure. However, if you can separate between the business and private purposes, the business part can be included in the allowable expenses.
VAT affects the amount that is included in the allowable expenses. Value added tax (VAT) is an indirect tax on transactions. It is a consumption tax that is charged on taxable supplies of goods and services made in the UK, by a taxable person, in the course of business. If the company is VAT registered, the net amount (expense less VAT) is used to reduce the turnover; however this can only be done if the VAT on the expense is recoverable. If the company is not VAT registered, the total amount spent on the expenses including VAT is used.
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