When you run a business you can deduct expenses incurred wholly and exclusively for the purposes of that business when computing the profits of the trade. This general rule applies to all categories of expenses.
Capital or revenue?
To be deductible as an expense, the item in question must be revenue expenditure rather than capital expenditure. Revenue expenditure is broadly day to day expenditure on services and supplies. By contrast, capital expenditure is expenditure on significant assets that will typically be used by the business over a number of years.
The distinction between capital and revenue expenditure is of particular relevance when looking at expenditure incurred in relation to premises.
Costs of maintaining premises
You may run your business from dedicated business premises, or it may be run from your home. Where a business is run from dedicated premises, the expenses incurred in maintaining and running those premises will be incurred wholly and exclusively for the purposes of that business.
Expenses that may be incurred in relation to the premises include items such as business rents, light, heat, repairs and insurance.
Where the business is run from home, the costs of maintaining the property will have both a business and a private element. The expenses need to be apportioned to determine the business element which could be deducted in computing profits. For example, if one room in a home with eight rooms is used for the business, it would be reasonable to deduct one-eighth of the associated premises costs. Note that if a room is used solely for business purposes, any gain pertaining to that room would not be eligible for the capital gains tax (CGT) private residence exemption when the property was sold. However, this rarely a problem in practice, given the availability of the CGT exemption and the current property market.
From 2013/14 onwards, new legislation will allow sole traders and partners in a partnership wholly comprising individuals to claim a fixed rate deduction where a business is run from home. This is an alternative to working out an apportionment of actual costs. The deduction is a set monthly amount determined by reference to the total hours spent in the home wholly and exclusively on business matters. Hours spent by an employees are taken into account. The deduction is set at £10 per month where the hours worked is 25 to 50, £18 per month where the hours worked is 51 to 100 and £26 per month where the hours worked is 101 or more.
From 2013/14, a fixed rate deduction can also be claimed by sole traders and partnerships comprising individuals where business premises are also used as a home. A fixed monthly amount is deducted from the actual premises costs for the month depending on the number of occupants. The deduction is £350 for one occupant, £500 for two occupants and £650 for three or more occupants. Again, this is an alternative to making an apportionment.
All properties need some on-going maintenance and premises used for the purposes of the business are no exception. A deduction is given for expenditure on repairs as long as it is revenue in nature and incurred wholly and exclusively for the purposes of the business. A distinction is drawn between a repair, which is revenue in nature, and an improvement, which is capital. A repair is essentially something that restores the original condition whereas an improvement enhances it. Common repairs include painting and decorating, fixing tiles, mending something that is broken etc. The cost of any repairs can be deducted in computing profits.
Relief for capital expenditure is given by means of capital allowances.
Practical Tip :
To save work, sole traders and partnerships can claim fixed rate deduction from April 2013.