How to Claim Allowable Expenses on Financed Items
Understanding how to claim allowable expenses is crucial for any business aiming to minimize its tax liability. Typically, you claim tax relief on expenses in the tax return corresponding to the period when the expense occurred. However, when it comes to items purchased on finance, things can get a bit tricky.
Financing allows you to spread the cost of an item, like office equipment or software, over a specific period rather than paying for it all at once. This arrangement can create confusion when filing your tax return since the entire cost hasn’t been paid upfront. Let’s explore what allowable expenses are and how you can claim them on financed items.
What Are Allowable Expenses?
Allowable expenses are essential business costs that you can deduct from your income to reduce your taxable profit. These could be anything from the cost of raw materials to the utility bills for your office. By claiming these expenses, you ensure that you’re taxed only on your profits, not on your total income.
Common Types of Allowable Expenses
Allowable expenses cover a wide range of business-related costs. Some common examples include:
- Travel Expenses: Costs related to business travel, such as fuel, train tickets, and airfare.
- Office Expenses: These could be your phone bills, internet service, or office supplies.
- Uniform and Safety Gear: Clothing expenses like uniforms or protective wear required for your job.
- Financial Costs: Fees like bank charges or business insurance premiums.
- Business Premises Costs: Payments for heating, lighting, and business rates.
- Training and Development: Costs for courses that enhance your skills for the business.
- Marketing and Advertising: This includes expenses like website hosting or online ads.
- Goods for Resale: The cost of materials or products that you buy to sell on.
In essence, anything that is exclusively used for business purposes can usually be claimed as an expense.
Can You Claim Allowable Expenses on Finance Payments?
Yes, you can. When you finance an item, such as a new computer or business vehicle, you can still claim tax relief on the amounts you pay according to your finance agreement.
For instance, a photographer might finance a high-end camera, spreading the payments over two years to manage cash flow. Even though the total cost isn’t paid upfront, they can still claim the payments made during the relevant tax year on their tax return.
How to Report Financed Items on Your Tax Return
When reporting financed items, you can claim the portion of the payments made during the tax year that your return covers.
For Example: Let’s say you purchase a business laptop on finance and agree to pay it off over 12 months. When completing your Self Assessment tax return, you can claim the amount paid during that specific tax year.
If you run a limited company, you would claim tax relief on the payments your business made during the period covered by its Company Tax Return.
Which Financed Items Qualify for Tax Relief?
You can claim tax relief on financed items used exclusively for your business. If you would have been able to claim tax relief on an item paid for upfront, you can generally claim for it when financed – just spread over the payment period.
If you’re unsure about whether an item qualifies, it’s wise to consult with an accountant to ensure you don’t miss out on potential tax relief.
What If I Use Financed Items for Personal Use?
If an item is used for both personal and business purposes, you can still claim tax relief, but only on the portion related to business use. For example, if you finance a vehicle and use it 70% for business and 30% for personal trips, you can only claim 70% of the finance payments as an allowable expense. Keep a record of how often you use items for personal versus business purposes, so your accountant can calculate the correct claim amount.
What Documentation Do You Need?
Make sure you have all the necessary financial agreements and records in case HMRC requests them. If you haven’t received a financial agreement from your provider, ask for one to ensure everything is documented.
Can You Backdate Financed Payments?
Good news! You can backdate claims for financed expenses up to four tax years, allowing you to adjust your returns if you’ve missed out on claiming any allowable expenses.