Written by Ray Coman
An expense can only be deducted from profits for tax purposes if it is wholly and exclusively for a business purpose. This applies to profits from a sole trader, partnership or limited company.
For earnings from employment, the expense must also be incurred necessarily for business purposes. In practice, employment expenses are confined to such outgoings as professional subscriptions, pension contributions and non-commuting, business travel. Often employment expenses are covered by the employer, and therefore no further relief is available.
An expense will not be exclusively for business where it serves a dual business and non-business purpose. Certain types of expense cannot be deducted from taxable profits because they are required in spite of any business reason. Broadly, these include costs required for: food to live, clothing in an everyday wardrobe, a place to reside, a desire for good health, avoiding criminal charges and a wish to help loved ones.
Many types of expense have a mixed business and non-business use. Although not wholly for a business purpose, in practice HMRC allow the business proportion of the total cost to be deducted from tax adjusted profits.
If a limited company pays for the private expenditure of its employees, then the cost can still be deducted from company profits in the same way as wages. However, the employees will have to pay income tax on the benefit in kind. This is with the exception of a certain few kinds of non-taxable benefits. To spare the extra administration that comes with providing benefits, it is possible to apportion the business part of an expense to the company and the non-business part to the employee. This is practical for one person companies where the priority is to minimise administration rather than to offer perks.
Certain types of benefit, in particular cars, are considered benefits even if there is only the possibility for private use. As an exception, it is not possible to apportion motor expenses so as to avoid benefit in kind administration.
Notwithstanding the apportionment rules, a definite part of the expense has to be wholly and exclusively for business, otherwise the whole expense will be disallowed. For instance, where a journey was made for a remote business reason and substantially for a holiday, the courts have argued none of the travel costs are allowable.