Expenses with Private and Business Use
25.06.2018 , BY Ram Karki
25.06.2018 , BY Ram Karki
We are seeing more scrutiny from HMRC, with creative argument about the dis-allowability of expenditure in accounts, particularly in respect of unincorporated businesses. Enquiries are opened where individuals are asked to provide a detailed analysis of even relatively low amounts in their accounts, resulting in a genuine dispute between HMRC and the business about the nature of the expenditure.
The S34 Income Tax (Trading and Other Income) Act 2005 for unincorporated businesses, such as self-employed doctors, prevents taxpayers deducting expenditure in computing their trading profits if they do not meet the following two tests:
In reality, it is not a straightforward area to consider when it comes to the argument of “wholly and exclusively”, therefore you need to exercise care when applying the test.
The “wholly and exclusively” test can be divided into three parts:
How does this work for expenses which are partly for business purposes and partly for private purposes?
The rule is that where an “identifiable proportion” (e.g. 40%) of the expense is “wholly and exclusively” for the purpose of the trade, you may claim that proportion as an allowable expense against your business income.
On the other hand, if there is no separately identifiable business element, you can claim nothing - the whole expense is treated as if it were private expenditure.
Matthew is a doctor, working as a self-employed GP locum. He uses his mobile phone to make and receive business and private calls. Here, there is an identifiable business element - Matthew can look at an itemised phone bill and see the exact costs of business calls. Matthew can therefore include a proportion of his phone costs as a deduction from his self-employed income. The proportion he will claim is the ratio of business calls to private calls.
(In practice, it may be sufficient to make detailed records for, say, a couple of months and take this proportion of the bills for the whole year).
Angela is an anaesthetist doctor working in an NHS hospital and she also has a private practice as a self-employed medical practitioner. She travels to attend annual conferences on the latest medicinal and patient care development in exotic locations in Brazil. The travel and the exotic locations may be benefits but, where there was no private purpose, they are incidental to the carrying on of the profession and the full cost, including travel, is allowable. Such an incidental benefit does not, of itself, mean that the expenditure is disallowed.
Current Issues - Travelling Expenses:
We are seeing a concerted effort on the part of HMRC at the moment in relation to travelling expenses for self-employed workers. The cost of travelling from home to work is generally not allowable for tax purposes, unless the individual is an itinerant trader. This is because the object of the journeys to and from work is not to enable him/her to do his/her work, but to enable him/her to live away from it, therefore it is considered to be part of your ordinary commute. Other travel outside the ordinary commute is generally allowed provided it is “wholly and exclusively” for work purposes.
Expenses such as telephone, motor expenses, postage and stationery, professional subscriptions and rent/mortgage interest could have an identifiable business element.
Some expenses are dual purpose, where the business and private element cannot be separated. In this case, none of the expenses can be claimed as business. Examples would be clothing and meals. Everyone must eat to live, says the tax office, which means that, in general, you cannot include your day to day meals as a business expense. However, there is recognition that meals whilst out and about travelling can cost more. If the travel is part of your normal pattern of work, then you cannot claim any meals during the day, e.g. a doctor travels and works out and about at various hospitals. Travel costs are allowable, but excluding the normal commute from home, but the subsistence is not because it is part of the normal work pattern. If the journey is more of a one-off and not part of the normal work pattern, then you can include meal expenses during the day, e.g. a self-employed doctor attending a course and conference can include both travel and meal costs for a whole day out at a conference.
Only in exceptional circumstances would clothing expenses be classed as a business expense. For example, specific items of safety clothing or uniform may be a business expense.
There is detailed guidance on the “wholly and exclusively” rule in the HMRC on-line Business Income Manual as follows: