Claiming allowable expenses is important in any business, helping to reduce the amount of tax it pays on its profits. You’ll (normally) claim tax relief on an expense in the tax return which covers the time when it happened, but what happens if you’ve financed an item?

Financing an item (for example software or equipment) is when you enter into a contractual agreement to spread the cost over a specific amount of time, rather than paying for it all upfront.

This can be confusing when it comes to filing your tax return, because you haven’t paid the full amount yet. We’ll discuss allowable expenses, and how you can claim them on financed items.

What is an allowable expense?

Allowable expenses are essential purchases you need to make in order to run your business. For instance, your phone bill or raw materials. Claiming these type of expenses ensures you only pay taxes on your profit, instead of all of your income.

It’s super important to make sure you know what your allowable expenses are, so you can offset them against your total income to avoid paying too much in tax.

What’s classed as an allowable expense?

There’s a whole load of things classed as an allowable expense, but the most common ones are:

• Travel costs (think fuel, train, bus fares etc)
• Office costs (such as phone bills)
• Clothing expenses for uniforms or required safety wear
• Financial costs (for instance, insurance or bank charges)
• The costs of running your business premises (this is things like heating, lighting, and business rates)
• Training courses related to your business
• Advertising and marketing (for example, the cost of hosting a website)
• Things you buy and sell on (raw materials or stock)

But, in short, anything you use exclusively for business purposes can be claimed as an expense.

Can I claim allowable expenses on my finance payments?

In short, yes. You can claim relief on the amounts you pay as per a finance agreement.

Many people finance items because it helps them to manage their cash flow over a period of time, rather than paying a large amount out in one go. For example, vehicle technicians may purchase expensive equipment and spread the cost over a period of time.

How do I show financed items on my tax return?

When you show this cost on your tax return, you will be able to claim the payments you’ve made during the period which your tax return covers.

What type of financed items qualify for tax relief?

You’ll be able to claim tax relief on items you use wholly and exclusively for your business. If you could claim for something you paid for upfront on your tax return, you’ll likely still be able to claim for it if it’s on finance – just over a longer period.

If you’re confused as to what can and can’t be claimed for – speak with an accountant to make sure you don’t miss out!

Can I claim tax relief on financed items if I use them for personal use too?

Yes – but only for the portion of the cost which relates to business purposes. It’s important you make note of how often you use things for personal reasons versus for business, so your accountant can tally up exactly how much you can claim.
 

What documents do I need to claim tax relief on financed items?

It’s crucial you have all your financial agreements available, in case HMRC asks to take a look. If your provider hasn’t sent you a financial agreement, ask for one so you have everything in writing.

Can I backdate any financed payments my business has previously made?

The good news is you can backdate financed expenses from up to four previous tax years!

 
Need an accountant to help you with allowable expenses? Give us a call on 020 3355 4047 or get an instant online quote.