When people speak about business costs they typically speak about one type of business cost, revenue or business expense. There are in fact 3 different categories of business cost as listed below:
1. Capital
2. Business
3. Personal
Sometimes people confuse the three and this can cause errors when completing the business accounts or tax returns.
Capital Expense
This is the cost that is incurred when making purchases to buy, maintain or improve a business asset with the aim to increase business profits. Capital expenditure is generally of a higher value and the asset is expected to last for more than one year in the business. You may hear of items bought in this nature referred to as fixed assets and include things such as vans, property, technology, machinery and other long lasting small assets such as tools or furniture.
These items are treated differently in the business accounts so it is important to understand the difference.
Capital allowances are available to sole traders as well as limited companies and partnerships. If you are unsure if you have a business purchase that qualifies for capital allowances then book a call today and we can help you.
Business Expense
This is fairly straight forward as a business expense is a cost that is incurred wholly and exclusively for the purpose of trade and does not qualify as a capital expenses. So these items would be smaller purchases and include consumables, materials, stationary, advertising, accountancy fees, travel expenses and any other cost incurred for the purpose of trade. You may also hear these referred to as revenue expenditure, because these are the costs that are incurred in order to help the business make sales revenue.
Business expenses are allowable for tax relief so the total business expenses reduces the total taxable profit so it is important to keep track of all the business expenditure to avoid over paying tax. Accurate bookkeeping records are key to ensuring that you obtain the tax relief that you are entitled to and lots of businesses miss out on tax relief everyday by not keeping track of all the outgoings.
Some business costs are not allowable such as entertaining clients, lunch every day (there are rules on claiming the cost of food) but check this with your accountant or check out gov.uk for guidance on self employed expenses.
Personal Expenses
Personal Expense is not allowable and is for things that you purchase for personal or private use. If you have an expense that has dual purpose you need to ensure that you can identify the business element and then you disallowable the personal use of the expense as this does not receive tax relief.
Book a free call today to see how we can save you time and taxes or to read more on the benefits of submitting your tax return early see our other blog here.
Are you on facebook? Why not check out the Salon and Beauty Therapist Tax Facebook Group to see how other members survive tax season and more.
Friendly disclaimer: The information contained in this article is for guidance and information purposes only. It should not be relied upon as full and complete accounting, tax or legal advice. For specific advice relevant to your own situation please speak to Ria-Jaine MAAT or another professional direct.
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Ria-Jaine Lincoln is an award winning accountant ranking in the top 50 women in accounting worldwide.