Expenses with private and business use

When you are self-employed, you can claim a tax deduction for expenses which are ‘wholly and exclusively’ for the business.

How does this work for expenses which are partly for business purposes and partly for private purposes?

The rule is that where an ‘identifiable proportion’ (e.g. 40%) of the expense is ‘wholly and exclusively’ for the business, you may claim that proportion as an allowable expense against your business income.

On the other hand, if there is no separately identifiable business element, you can claim nothing – the whole expense is treated as if it were private expenditure. Sometime the tax office will use the term ‘dual purpose’ for business and private expenses where the separate business proportion cannot be identified.

Examples:

1) Matthew has one telephone line in his house. He works from home. He uses the phone to make and receive business and private calls. Here there is an identifiable business element – Matthew can look at an itemized phone bill and see the exact costs of business calls. Matthew can therefore include a proportion of his phone costs as a deduction from his income. The proportion he will claim is the ratio of business calls to private calls. (In practice it may be sufficient to make detailed records for, say, a couple of months and take this proportion of the bills for the whole year).

2) Angela is a painter living in Oxford. She has a business client who lives in Edinburgh. She travels by train to Edinburgh to see the client, but stays on for a week for a holiday. Can she claim the costs of the train travel to Edinburgh as a business expense? Here there is no separately identifiable business element – the train travel covers both a private function of getting her to her holiday destination and allowing her to see a client. Because there is no separately identifiable cost she is not allowed to treat the travel as a business cost. Note: The separate cost of travel from the station in Edinburgh to the client address in Edinburgh is a business expense and could be claimed.

There is detailed guidance on the ‘wholly and exclusively’ rule in the HMRC on-line Business Income Manual http://www.hmrc.gov.uk/manuals/bimmanual/BIM37000.htm

To summarise:

a) Expenses with business and private use and an identifiable business element

Expenses such as telephone, motor expenses, postage, stationery, heating and lighting, rent / mortgage interest could have an identifiable business element

b) Expenses with business and private use and no identifiable business element

Some expenses are dual purpose, where the business and private element cannot be separated. In this case none of the expense can be claimed as business. Examples would be clothing and meals.

Only in exceptional circumstances would such expenses be business expenses. For example, specific items of safety clothing may be a business expense; meals taken as part of a business journey away from home are usually allowable.