Non-deductible expenses are those that cannot be subtracted from your taxable income when filing your Self Assessment tax return. Essentially, these are expenses that do not reduce your tax liability. While distinguishing between deductible and non-deductible expenses might seem straightforward, the distinction can sometimes blur, making it challenging to determine what you can legally claim.
Identifying Non-Deductible Expenses
For the self-employed, claiming business expenses offers a way to lower your overall tax bill. However, HMRC's criteria for what constitutes an allowable expense are strict, mandating that expenses be incurred "wholly, exclusively, and necessarily" for your business. The necessity to demonstrate that an expense is purely for business purposes is crucial.
Common Non-Deductible Expenses
Understanding what you cannot claim as an expense on your tax return is vital. Here are some common non-deductible expenses:
- Personal meals and drinks,
- Entertainment costs for clients, such as meals or drinks (Note: entertainment expenses for employees might be claimable under a limited company),
- Gifts for customers,
- Donations not made through Gift Aid,
- Legal fees related to share capital issues or capital items (such as equipment or property),
- Fines and penalties,
- The purchase cost of a vehicle (unless eligible for capital allowances),
- Commute expenses between home and primary workplace.
Calculating Deductible Portions of Mixed-Use Expenses
When a business asset is also used personally, determining the deductible portion can get tricky. Here's how to approach mixed-use expenses:
Imagine purchasing a laptop primarily for your business, but you also use it for personal activities half the time. The portion of the laptop's cost attributed to personal use would be considered non-deductible, meaning only 50% of its cost could potentially be claimed on your Self Assessment tax return.
Key Takeaways
Understanding the nuances of deductible and non-deductible expenses is essential for accurately filing your Self Assessment tax return and optimising your tax situation. Always ensure your claims meet HMRC's criteria and keep detailed records to substantiate your expense claims, especially when an item is used for both business and personal purposes.
