Expenses can be a tricky business
It is important to keep proper records and ensure payments of all business-related expenses are made through the company accounts. Vinku Shah explains…
From April 1, 2023, companies with profits up to £50,000 will continue to pay corporation tax at 19 per cent whereas those with profits over £250,000 will pay corporation tax at 25 per cent.
Companies with profits between £50,000 and £250,000 will pay tax at the main rate reduced by a marginal relief providing a gradual increase in the effective corporation tax rate.
With most pharmacy business owners facing an increased corporation tax liability, it is important to ensure that deductions are claimed for all allowable business expenses, and this could result in significant corporation tax savings. Below we explore some of the rules for certain expenses that can be claimed in order to reduce the corporation tax liability.
The basic rule is that business expenses can only be deducted when calculating taxable profits if they are wholly and exclusively incurred for the purpose of the business.
Dual purpose expenses
You cannot deduct private expenses from business profits but there are some expenses that have an element of both business and private use for example mobile phone or computer used for both purposes.
You will be able to claim a deduction for the business proportion where the cost of business use can be separately identified for example itemised call logs. If business and private use cannot be separated, then the cost may be apportioned on a just and reasonable basis.
If you use your personal vehicle for the business including personal electric vehicle, a deduction can be claimed for the costs incurred of using it in the business. As it is difficult to work out the exact costs that relate to business use, a simplified mileage allowance can be used.
For 2023/2024 the mileage allowance for motor vehicles is 45p per mile for the first 10,000 miles and 25p per mile thereafter and it covers wear and tear, fuel/electricity, and maintenance costs.
If the mileage allowance is used, it is important to note that cost of fuel/electricity, servicing, MOT, etc. cannot be claimed as an expense in the business although incidental costs of journeys can be claimed like road toll and congestion charges. Mileage records will need to be maintained and provided to the HMRC inspector in case of inquiry.
If you are able to work out the actual costs of using your own vehicle and it is more than the mileage claim, then you should claim the actual cost but whatever method is used to claim the costs for a vehicle, then it has to be applied throughout the time you use that vehicle in the business.
Use of home
If you have part of your home set aside for business use, a portion of the fixed costs (rent, mortgage interest, insurance, council tax, general repairs) can be claimed as business expenses. The apportionment should be made on a just and reasonable basis for example using floor area or number of rooms.
If part of the home is used exclusively for business, and the home is sold for a gain, that part of the home will not benefit from capital gains tax exemption and therefore tax will be payable on the gain on that part of the property.
You can also claim a deduction for running costs like electricity, water, gas, etc. If it is not possible to identify the amount incurred because of business activity, the bills will need to be apportioned on a just and reasonable basis between private and business use.
Alternatively, a simplified statutory deduction is available for use of home as office based on the number of hours worked from home each month according to the table below:
No. of hours worked from home Monthly deduction
25 to 50 £10
51 to 100 £18
100 or more £26
The cost of general clothing is not an allowable deduction as it does not meet the wholly and exclusively test. However, a uniform can be just your normal clothes with your company logo on it and the cost becomes and allowable deduction. This would have the added benefit of promoting your pharmacy.
Costs incurred in traveling to the place of work from home and vice versa are not allowable costs. However, costs of travel between branches or to suppliers, etc. will be fully deductible when computing profits.
As pharmacists require regular training to keep their skill up to date, the costs related to this are fully allowable deductions. The training courses have to be relevant to the job as costs of training to updating skills are allowable whereas costs incurred in acquiring a new skill are not allowable.
Generally, the cost of entertainment is not an allowable deduction unless this is provided to employees subject to a maximum of £150 per head. Promotional events are not considered entertainment but the cost of any food, drink or other hospitality will not be allowed.
Professional subscriptions paid to General Pharmaceutical Council are allowable expenses as the GPhC appears on HMRC’s list of approved professional organisations. Subscriptions to other professional societies are also deductible provided that they are relevant to the business.
Key person insurance
As pharmacy business owners, it is more than likely that you are the superintendent pharmacist and the success of the business rests on your shoulders (the key person). The insurance premiums paid for protecting the business against loss of profits resulting from death, critical illness or injury to the key person are allowable deductions against business profits.
Loan finance costs
The incidental costs incurred in obtaining finance can be deducted when calculating the profits of the business. Some of the allowable costs include:
- Legal and professional fees incurred
- Commissions, arrangement fees, etc
- Valuer’s fees
To ensure that expenses are not overlooked, it is important to keep proper records and ensure payments of all business-related expenses are made through the company accounts.
It is advisable to have a checklist of business expenses that should be claimed and go through it with your accountant before finalising the accounts to ensure what could have been claimed has been claimed in the correct tax year and that you are not overpaying corporation tax.
Vinku Shah is a partner at Silver Levene.