Perhaps one of the biggest, and rather obvious advantages a business entity has over an employee is the ability to pay tax only after deducting valid expenses. In contrast, an employee who’s puttering away on the PAYE system has practically no scope to lower their tax bill by deducting expenses.
Whatever legal umbrella your business falls under, it can enjoy several write offs for purchases made, and expenses incurred within its normal day to day operations. Each business will have specific costs and expenses that it will be able to write off against profits – the below, while in no way being a complete list, are a few of the more common examples of tax deductible allowances:
- Wages – This can go beyond just employees on PAYE. Globalization and outsourcing have resulted in companies often outsourcing work to contractors who might well reside in a different city or even country. The point is, as long as they are doing work directly for your company, and are billing you via invoices, you can write off their cost of employment against your profits.
- Rent – For companies who lease an office/building, the rent is tax deductible. It’s worth noting, even if you’re a one man band who’s chugging away out of your home office, it is often possible to have a segment of your home rent deducted against your profits. It may be as little as 15% of your entire rent, but it’s still better than nothing.
- Supplies – Office stationary and print are an everyday business expense that may be written off.
- Equipment that is purchased solely for the business, while stored on the balance sheet may be depreciated over time – the annual depreciation is an expense which is effectively tax deductible, as each year it pops up on the company profit & loss account before the calculation of any taxable income.
- Travel. Many companies pay for staff members to travel to different locations to work. While there can be restrictions (for example when claiming on company cars and petrol), flights and accommodation may be written off in totality so long as used for business purposes.
- Telecommunications. Phones, broadband and other devices/charges used for communication and internet connectivity may be written off as a business expense.
- Random costs associated with your specific business. There are likely to be many industry specific costs that you may incur within your industry that are likely to qualify as a business expense. If your business offers internet or IT services, you may have need for cloud computing or a dedicated server, for instance. Both perfectly legitimate tax write offs.
As your business grows, make a note of all your expenses and talk to your accountant about which of these may be written off against your profits to legally lower your tax bill. If you haven’t hired an accountant yet, check out our article on how to choose a good accountant.
It’s very important to keep all invoices and receipts relating to any expenses that you intend to write off – good records on expenses written off should be stored for several years in the event of a HMRC audit or investigation.