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.

• The allowable expense will be affected by the value you place on stocks at the year end. A common mistake is to value stock at its selling price, rather than cost. This inflates your profit figure and increases your tax bill.

6.2 Directors' and employees' wages, pensions, and employers' National Insurance contributions (see 13).

6.3 Premises costs, such as rent and rates.

• 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).

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 Spending on research and development.

• You can claim R&D tax credits on qualifying spending at 175 per cent. This means you can set £175 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, plus 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.

6.8 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 the expense.

• If you are registered, VAT is reclaimed separately.