Top 10 Tax Deductions for Small Businesses
Updated: Oct 20
Every business has the responsibility to make sure they are paying the right amount of tax to HMRC. However, each year, many business owners pay unnecessary tax because they fail to claim tax relief on legitimate deductible expenses.
These circumstances are particularly common amongst small businesses, as they choose to manage their financial duties without seeking the help of a professional tax consultant.
If you’re aiming to grow your company’s financial performance, here’s a list of the top 10 small business tax deductions UK every savvy owner should take advantage of.
What expenses are tax deductible?
According to HM Revenue & Customs, an item becomes a deductible business expense when incurred wholly, exclusively and necessarily for business purposes. Any items purchased for personal use are not eligible for business tax deductions, but those acquired for a mix of purposes may be partially deductible.
When an expense is claimed for tax return purposes, the item’s invoices/receipts must be retained for a set period of 6 years. Failure to do so may result in a fine of up to £3000 from HMRC.
1. Home office expenses
If you’re a small business owner working from home, you may claim the costs of a home office from your turnover. Home office deductions are £4/week and there is no need to provide receipts, itemised bills or other documentation.
Accommodation becomes a legitimate deductible expense when incurred solely and necessarily for business purposes. For example, if you’re going on a business trip, you may claim tax relief on the costs of a hotel room. The same applies to parking - fees incurred during business trips are deemed allowable expenses.
Car mileage is a deductible expense when used for business. The cost is fixed at the standard mileage rate of £0.45/mile for the first 10,000 miles and £0.25 for each additional mile. For motorcycles, the cost is fixed at £0.24 per mile. This amount covers fuel, as well as wear and tear to your vehicle.
You can claim bicycle business mileage at £0.20/mile, including mileage between work and home and/or work and client meetings. However, the cost of your bicycle and its maintenance are not eligible for small business tax deductions because it is deemed as personal property.
If you hire a vehicle for business use, you may deduct the costs from your tax bill. If you will also be using the vehicle during personal time, then you will only pay tax on the time ratio spent on the personal use of the vehicle.
You can claim back the tax on your flight ticket costs, provided that the trip was exclusively for business purposes.
4. Broadband, computer hardware and mobile phones
Internet, mobile phones, hardware and computer consumables can all be added on your small business tax deductions checklist, so long as they are all used wholly and exclusively for business purposes.
5. R&D costs
If your company is investing in the research and development of new products, services and technologies, you can claim back an average of 25% of the R&D cost of a project. Current R&D tax credit rates mean SMEs can claim up to 33p for every £1 on qualifying R&D activities with the average cashback to companies being around £50,000.
Find out if you are eligible for R&D Tax Credits here.
6. Plant & Machinery costs
Small business owners can deduct the cost of ‘plant and machinery’ equipment, including computing, manufacturing and office equipment before calculating the company’s Corporation Tax bill, provided that purchases are made in the company name, with relevant records to prove this.
7. Training courses, magazine subscriptions and business books
You may claim back the tax on these items when they are relevant to your business’ trading activities. For example, a professional marketing journal is tax deductible for a marketing agency, however, a magazine like Top Gear isn’t.
8. Pension contributions
You can get tax relief for contributions to your retirement plan which you either make personally, as a sole trader or partner, or which your company makes on your behalf. This will extend to pension contributions for any family members working in your business.
9. Accountant fees
Your accountant’s fee fits the description of wholly, exclusively and necessarily incurred for business purposes. These expenses can therefore be deducted from revenue. The only exception is when these professional fees arise from a HMRC ‘enquiry’ and the enquiry is proven to have arisen from negligence or fraud.
10. Staff parties & events
The cost of staff parties, including Christmas parties and other annual events are usually allowed as deductible expenses. However, the annual cost per attendee head has to be a maximum of £150.
If you’re looking to grow your business, the Regional Growth Fund Scheme was created to support small companies or businesses looking for more finance options. With funding of up to £1 million available, you can help your business develop beyond the start-up stage, and start making an impact on a local and regional level.
There are also numerous government business grants available to small businesses, startups and new ventures. However, securing the funding can be tricky and challenging due to the specific criteria that each business grant will require.
CapEx Tax are experts in plugging businesses into available pots of money. Whether that’s through tax deductions, business grants, capital allowances or stamp duty land tax refunds, our team of chartered advisors, accountants and surveyors are always ready to source the funding/ relief you are entitled to.