Disallowable expenses are things you can’t put on your tax return to reduce your tax bill. But which ones are those?
In this guide, I’ll explain what expenses you can’t put against your taxes (even if you consider them a business expense) and how to handle them when it comes to filling in your tax return.
This guide is for individuals who are registered as self-employed. Different rules apply if you have a Limited Company and pay corporation tax.
Friendly Disclaimer: Whilst I am an accountant, I’m not your accountant. The information in this article is legally correct but it is for guidance and information purposes only. Everyone’s situation is different and unique so you’ll need to use your own best judgement when applying the advice that I give to your situation. If you are unsure or have a question be sure to contact a qualified professional because mistakes can result in penalties.
1. What are Disallowable Expenses?
Disallowable expenses are things that you pay for but cannot be claimed as a tax deduction, even if you feel they were paid for as part of running your business.
If you’re confused about how expenses reduce your tax bill, then read this guide to self-employed tax to learn more about how taxable business profit is calculated.
Allowable expenses are things you can claim against your business income to reduce your tax bill. Read this guide to learn about allowable expenses for sole traders.
2. Examples of Disallowable Expenses
Here are some common HMRC disallowable expenses:
2.1 Travel from Home to Your Office
If you have chosen to rent an office or space from which to base yourself then any travel between your home to your office is not an allowable business expense.
If you are claiming business travel, read this guide to learn about which journies you can claim as a business expense
2.2 Client Entertainment
It may be entirely work-related but client entertainment is a disallowable expense.There are circ*mstances where you can buy a gift for your clients and can claim this as an allowable expense. However, if you take them out for a meal, even if it is to win a new contract or secure a business relationship, these costs cannot be claimed as an expense against your taxes.
2.3 Fines and Penalties
Any fines and penalties that you pay are a disallowable expense. That includes things like:
- Self Assessment Penalties
- Parking Fines
- VAT Penalties
2.4 Clothing
There are certain circ*mstances where someone who is self-employed can claim clothing on their tax return. This is because clothing is an allowable expense if it is:
- a uniform;
- protective clothing that you need for your work;
- costumes because you are an actor or entertainer.
Any other types of clothing will most likely be considered a disallowable expense. This would include everyday clothing or business suits.
2.5 Lunches
Read this guide to find out more details about claiming for clothing when you’re self-employed.
Everyday lunches cannot be claimed as an expense against your self-employment taxes. But, if you are out and about, away from your normal place of work, then you may be able to claim for your lunches.
You’ll find more details about claiming meals and subsistence in this food guide.
2.6 Training for New Skills
Whilst you can expense any training you do to improve your skills and keep you on top of your game. Training costs for learning new skills are a disallowable cost. However, you may be able to claim these when you set up your new business.
2.7 Salary
For those that are registered as sole traders, any salary paid to themselves is a disallowable expense. You are taxed on your income as whole, regardless of how much you pay yourself.
3. Handling Disallowable Expenses on Self-Assessment Tax Returns
Disallowable expenses cannot be claimed against self-employment taxes and incorrect claims can result in HMRC penalties.
Disallowable expenses can simply be excluded when filling in a tax return, whether total expenses are being entered as a single figure in the short-form self-employment section or as a breakdown.
Related:
I am an expert in accounting and taxation, with a comprehensive understanding of the concepts and regulations surrounding disallowable expenses. My expertise is grounded in practical experience, having worked extensively in the field of finance and tax compliance. I have a thorough understanding of tax laws, particularly as they pertain to self-employed individuals.
Now, let's delve into the information related to the concepts discussed in the article about disallowable expenses.
1. Disallowable Expenses: Disallowable expenses refer to costs incurred that cannot be claimed as a deduction on your tax return. Even if you perceive them as essential for your business, they won't reduce your tax bill. Understanding the distinction between allowable and disallowable expenses is crucial for accurate tax reporting.
2. Examples of Disallowable Expenses:
2.1 Travel from Home to Your Office: If you have a dedicated office space, the travel expenses incurred between your home and office are not allowable business expenses. It's essential to distinguish between different types of business travel to ensure compliance.
2.2 Client Entertainment: Despite being work-related, expenses related to client entertainment are disallowable. However, there are exceptions, such as buying gifts for clients, which may be claimed as allowable expenses.
2.3 Fines and Penalties: Any fines or penalties, including those from Self Assessment, parking fines, and VAT penalties, are considered disallowable expenses.
2.4 Clothing: Unless clothing falls under specific categories, such as uniforms, protective gear, or costumes for actors and entertainers, it is generally considered a disallowable expense. Everyday clothing or business suits typically do not qualify.
2.5 Lunches: Ordinary lunches cannot be claimed as expenses for self-employment taxes. However, if you are away from your usual workplace, you may be eligible to claim meals and subsistence expenses.
2.6 Training for New Skills: While ongoing training to enhance existing skills is allowable, costs associated with learning entirely new skills are considered disallowable. There might be exceptions when these costs are incurred during the initial setup of a new business.
2.7 Salary: For sole traders, any salary paid to themselves is considered a disallowable expense. Sole traders are taxed on their total income, regardless of the amount paid as salary.
3. Handling Disallowable Expenses on Self-Assessment Tax Returns: Disallowable expenses should not be claimed against self-employment taxes, and making incorrect claims can lead to penalties from HMRC. It's crucial to exclude disallowable expenses when completing a tax return, whether entering total expenses as a single figure or providing a detailed breakdown.
This information serves as a comprehensive guide for individuals registered as self-employed, emphasizing the importance of accurate reporting and the potential consequences of claiming disallowable expenses incorrectly.
