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 Spending on research and development (R&D) by small and medium-sized enterprises.

• You can claim R&D tax credits on qualifying spending at 150 per cent. This means you can set £150 off against your profits, for every £100 you spend.
• Only limited companies can claim R&D tax credits.
• 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.
• To take advantage of these credits you must spend £10,000 or more on research and development in an accounting period.

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 gas, electricity, water, telephone and council tax charges 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 bills, insurance, transport, travel and subsistence (eg hotel costs on a business trip), repairs, postage, accounting and most other services.

6.7 Directors' and employees' wages and benefits (see 9), and employer's National Insurance 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).