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Getting Started

Top five tax-deductible expenses

Taking advantage of tax reliefs can improve a start-up’s cash flow

Top five tax-deductible expenses

Steve Hoon, tax director at accountants BDO, says that for start-ups, researching and getting expert advice about tax deductions is not only prudent business planning, it can have a materially positive impact on cash flow.

He says that one of the most important things for entrepreneurs to understand (and many don’t) is that tax deductions are not necessarily the same as the ‘cash expenses’ that start-ups incur. This can be a double-edged sword. There are expenses some entrepreneurs expect to be eligible for tax relief but are not, like client entertainment. But there are also tax relief opportunities that some entrepreneurs miss. Here is his ‘top five’ list for start-ups, but do you agree with him or are there other reliefs that are more important to you?

  1. Property

In the very early days of most businesses, a lot of work inevitably gets done from founders’ homes. This is an opportunity for entrepreneurs to claim tax relief for some property related expenses - such as rent, mortgage interest and utility bills. It’s not an exact science and HMRC do offer guidance in this area, but this can be complex.

Even when the business moves to its own commercial property, if founders also work from home, as is common, it may still be possible for the business to claim some tax relief on these costs.

  1. Research and development

R&D tax relief can be very attractive, because of its potentially big positive impact on cash flow. For example, at the end of a start-up’s first year, in which R&D costs have been incurred, the business can receive a proportion of these costs back from HMRC as a cash tax credit, and not have to wait until the business becomes profitable in later years before receiving the benefit of the tax deduction.

There is often a misperception that R&D tax claims are only applicable to ‘high tech’ industries – such as new drug development in the pharmaceuticals industry – but this is not always the case. Claims are common in industries ranging from construction to agriculture. The key test is that the R&D project must attempt to make an advance in science or technology.

  1. Capital expenditure

Tax rules around capital spend can sometimes lead to some confusion, because they differ from accounting rules. A start-up business that spends money on capital items such as plant and machinery or fixtures and fittings, can claim the full cash cost of these items as expenses for tax purposes (subject to a limit) in year one. While for accounting purposes, only the first year’s depreciation will be expensed in the company’s profit and loss account, not the full cash cost.

  1. Travel

Steve says that as a rule, most travel expenses will offer tax relief – although importantly, not travel from home to the workplace, which is specifically disallowed as a tax deduction – but that the technicalities of how travel-related relief is claimed are often misunderstood.

Things like train travel to meet a client or supplier is a simple cash deductible business expense – the cost of the train ticket. But if an employee uses their own car for this travel, the business expense must be in the form of a travel claim by the employee at the per mile rates set by HMRC. It generally cannot be in the form of the business paying for petrol or for a proportion of the cost of the car (unless a formal ‘company car’ plan is established).

  1. Interest relief

Because it can be difficult for a start-up business to qualify for loan finance, some entrepreneurs borrow from the bank in their personal capacity, via a personal loan or sometimes using a credit card, and invest those funds into the business.

If this is done then Steve says there is a good chance that that interest payments would be a tax-deductible expense – for the entrepreneur, not the business, and that this relief is often overlooked. He does however stress that the details of this particular relief can be quite complicated and that getting the correct advice is essential.

​The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief relies on individual circumstances.

Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

​​​​​​​Information in this article does not constitute advice.