The “wholly and exclusively” rule for maximising tax relief

Are you maximising your tax relief by claiming everything you possibly can against your business income? Through meticulous organisation with your business records, the careful use of a business bank account and being aware of the basic rules and regulations around tax relief, significant amounts of tax can be saved simply by ensuring that you claim a deduction for all allowable business expenses. Broadly speaking, “allowable business expenses” are the costs that a business incurs in the efforts to operate and make a profit. Business expenses can be deducted against business income, which in turn reduces taxable profit, which in turn reduces tax payable. The question you need to ask is: “Was this cost incurred wholly and exclusively for the purposes of the business?” If the answer is “yes” then there is tax relief available and the obvious choice is for this to be maximised.  There isn’t even a requirement, like that for employees, to demonstrate that the expense was actually necessary for business operations. Simple? Yes… It sounds like the most basic advice however, it is surprising how many business owners fail to do this. Apart from understanding the “wholly and exclusively” rule to assess if something is in fact a business expense, it is highly recommended to do the following:
  • Use a business bank account for all considered business expenses – this way your accountant will be able to see the full picture via your business bank statements, regardless.
  • Limit paying for business expenses via personal cash or personal bank accounts – if you do just make sure you keep your receipts and record the nature of the expense somehow.
Of course, there are a few anomalies… purchasing capital equipment When purchasing capital expenditure, such as equipment, computers and machinery, even if they are wholly and exclusively for business use, the rules change. Those “capital costs” apply for a different type of tax relief, called a “capital allowance”. Figurit would be very happy to provide you with our help sheet “5 minute guide to understanding your financial accounts and business tax return” that covers this in more detail. What if part of the expense is “wholly and exclusive for business”? Does this mean I can not claim any tax relief? Another valid question for thought: what if an expense is part business and part personal, car expenses, for example?  Well, here rules apply to calculate a proportion of the expense that would be allowable for tax relief; the business part. The rules can vary slightly depending on whether the business is structured as a limited company, a sole trader or a partnership, so always best to seek advice for your own circumstances.

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