UK Fact-File Part 2:
Individual Business Domestic Taxation

2.4 UK Personal Allowances and Business Deductions

An individual who is liable to pay income tax receives an annual personal allowance to offset tax liability; in the tax year 2010-11 this allowance is GBP6,475. Further information on rates and allowances is available from HM Revenue and Customs: http://www.hmrc.gov.uk/rates/it.htm.

This allowance can be deducted from gross taxable income by self-assessment taxpayers, and will be taken into account automatically for PAYE (Pay As You Earn) taxpayers.

In addition to the personal allowance, individual taxpayers can often claim the following allowances and reliefs:

• Married couple’s allowance;
• Business-related expenses (such as business-related travel, the purchase of special tools or clothing, capital expenditure, subsistence allowance, subscriptions to professional bodies);
• Relief on pension contributions.

A self-employed individual can claim certain items of business-related and capital expenditure (including those detailed above) against their tax liability.

In a partnership, each partner is classed as self-employed and therefore each will receive the personal allowance and must submit his or her own self-assessment tax returns.

Limited companies are a separate legal entity so there is no concept of a ‘personal allowance’ in relation to the company, although there will be in relation to the profits as distributed to individual taxpayers. However, all bona fide costs incurred in running a business (eg heat, light, power, rent, rates, wages) can be offset against tax. There are rules too for calculating depreciation of assets and writing off bad debts.

Capital expenditure, for the purposes of possible tax relief, is defined as the purchase or improvement of assets. If tax relief is granted for any such expenditure it is usually by way of additional capital allowances rather than relief on the total cost of the asset or improvement. Relief may also be given on depreciation of assets. Examples of qualifying capital expenditure include plant and machinery, cars and vans, computers, fixtures and fittings, furniture and certain buildings.

Business expenditure, in terms of tax relief claims, is classified as being ‘wholly and exclusively’ for carrying on the business, ie there must not be any element of personal expenditure. This would include wages, rent, heat & light, transport and so forth.

Private, or personal expenditure (and which is not afforded tax relief) covers those expenses for day-to-day living which do not directly involve the business. This includes drawings (income) taken from a business.

If a sole trader or small business is based at home, it is important to differentiate between costs incurred to run the business as opposed to personal or private costs, as only the business portion will be claimable. This could apply where a self-employed consultant, architect or sports person is based in a home rather than in a traditional office.

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