When it comes to categorising business expenses, the rule is ‘wholly and exclusively for business purposes’ (The Income Tax (Trading and Other Income) Act (ITTOIA) 2005, s 34). The expense must have been used purely for the running of the business or trying to attract more customers in order to be allowable as a taxable expense.
So using the absolute definition of exclusively, an item which you make use of both for business and personal would not be allowable as that is not only for business use. However, there is the principle that if there is an identifiable proportion of the expense that is for business use, then this would be allowed. Conversely, if the business portion is not separately identifiable, the whole amount is disallowed.
An example of this is with contact lenses. Nobody can identify exactly how much of the time wearing the lenses is for business use, so the cost is disallowed. But, if a pair of glasses are bought solely to use for business purposes, such as safety glasses or special VDU glasses, the cost of those would be allowable. I wear varifocal glasses, the cost of these is not allowable as I wear them all the time.
This is a contentious area and there is a plethora of case law on the subject. I include one such example.
Spofforth & Prince v Golder (Inspector of Taxes)
Spofforth & Prince was an accountancy partnership that incurred legal costs to defend one of the partners against charges of conspiracy to defraud the Revenue.
Deduction of all legal costs for the proceedings, on the basis that they were incurred wholly and exclusively for the purposes of the profession was claimed by the firm. A later appeal then claimed those costs incurred prior to the service of the summons.
The court held that only the costs incurred by the firm up to the issue of the summons were deductible. The firm’s solicitors were acting for the firm in the ordinary course of business before the summons and in circumstances where it could say the purpose of its instructions and the incurring of the legal costs were for an ordinary professional purpose, in protecting its business. Afterwards, the purpose of the legal costs changed to being one where the partner’s personal position was being defended. This was also a purpose of the expenditure, which resulted in a dual purpose so that the costs were not deductible.
My recommendations for avoiding issues are:
- Be sensible and honest
- Maintain separation of expenses as much as possible
- Always use a separate bank account for the business
- Keep records if you do have expenses with identifiable business portions