Tax and NI

6. Expenses

You need to be clear about what expenses are allowable when working out your profit figure.

Business costs are allowable, but personal ones are not. Allowable expenses include:

6.1 Goods and materials, including anything your business buys in and then resells.

• Be careful about the value you put on your stock at the year end. A common mistake is to value it at selling price, rather than cost. This inflates your profit figure and increases your tax bill.

6.2 Any spending on research and development (R&D) by small and medium-sized limited companies.

• You can claim R&D tax credits on qualifying spending at 200 per cent. This means you can set £200 off against your profits, for every £100 you spend.
• R&D tax credits apply to the costs of staff and consumable stores used in your R&D efforts, including expenditure on software, power, fuel and water.
• Companies not yet in profit (or not yet trading) can claim cash payments instead.
• You must spend £10,000 or more on R&D a year to claim these credits.

6.3 Costs associated with your premises, such as rent, rates and heating.

• If you work from home, you can usually count a fair proportion of your domestic bills such as electricity and telephone charges and fixed costs such as mortgage repayments as business expenses.

6.4 Selling costs, including marketing and advertising expenses.

6.5 Finance costs, such as bank charges and interest (including leasing and hire purchase interest charges).

6.6 General running expenses, including telephone, travel and subsistence (eg hotel costs on a business trip), insurance postage, accounting and other services.

6.7 Directors' and employees' wages and benefits (see 9), and employer's NI contributions (see 10).

6.8 Bad debts, where specific invoices are unlikely to be paid.

6.9 If you are not registered for VAT, you treat the VAT element as part of your expenses.

• If you are registered, VAT is reclaimed separately (see 11).