Expenses that are not deductible as business expenses (for sole traders)
If you are self-employed, you need to pay income tax on your trading profit. This is the amount of money you make from your business after deducting allowable expenses. Allowable expenses are costs that are necessary and exclusively for your business, such as rent, utilities, equipment, advertising, etc. However, not all expenses are deductible from your trading profit. In this blog post, we will discuss some of the common expenses that are NOT deductible and why.
Expenses that are not deductible
Personal expenses: These are costs that are not related to your business, such as food, clothing, entertainment, hobbies, etc. You cannot deduct personal expenses from your trading profit because they are not incurred for the purpose of your business. As a rule of thumb, expenses must be Wholly and Exclusively for business purposes in order to be deductible.
Capital expenses: These are costs that are related to buying or improving fixed assets for your business, such as land, buildings, machinery, vehicles, etc. You cannot deduct capital expenses from your trading profit because they are not considered as expenses but as investments. Instead, you claim capital allowances for some of these assets. For small businesses, in most cases the amount would be covered by the Annual Investment Allowance, so the whole amount is deductible anyway.
Drawings: These are amounts that you take out of your business for your personal use. You cannot deduct drawings from your trading profit because they are not expenses but distributions of profit.
Illegal expenses: These are costs that are incurred for
illegal activities or purposes, such as bribes, fines, penalties, etc. You
cannot deduct illegal expenses from your trading profit because they are
against the law and public policy.
Entertainment costs: Similar to the rule applicable to companies, client entertainment costs are not deductible for tax purposes, and no input VAT can be reclaimed if you are VAT registered.
National Insurance costs: People that are self-employed pay Class 2 and Class 4 national insurance depending on their profit level. These are regarded as personal expense rather than business expense, and are therefore not deductible.
Political donations: Contributions made to political parties or candidates are not tax deductible.
If you had deducted these expenses in calculating your profit, then you need to add them back to get to your adjusted taxable trading profit.
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