Are accounting costs tax deductible?

For the most part, yes. Accounting costs for your business can be claimed as a business expense.

For business owners, this means you can deduct the amount you’ve paid from your total income before paying income tax (20-45%).

For limited companies, this means you can deduct the amount from your profits before paying corporation tax (19%).

But why exactly are accounting costs tax deductible, and what other costs can also be claimed? Here we’ll be talking about the rules for accounting costs and business expenses in general

Specifically, we’ll be answering these questions:

• Why are accounting costs tax deductible?
• What other expenses are tax deductible?
• What expenses aren’t tax deductible?
• How do I claim tax relief on accounting costs?

For an expense to be deductible, HMRC uses the “wholly and exclusively” rule. This means you can claim any amounts you’ve had to pay for items or services if they’re wholly and exclusively for the purposes of running or setting up your business, and give you no personal benefit. 

For example, if you run a construction business, you can claim back any money you’ve spent on vehicles used on site like forklifts, bulldozers, or diggers. 

If there’s something you use for both business and personal reasons, you can’t claim back the cost of the thing itself, but you can claim some of the running costs based on how much you use it for business reasons. 

For example, if you have a car that you use for work about half the time, you can claim tax relief on half of the petrol you’ve used. 

As we mentioned up top, you can claim tax relief on any costs that are wholly and exclusively for your business. There are 2 different kinds of costs you can claim:

• Capital allowances – usually one-off purchases.
• Business expenses – usually ongoing payments

You can get tax relief on assets that you keep to use in your business. This includes::

• Equipment
• Machinery
• Business vehicles, for example cars, vans or lorries These are known as plant and machinery.

Assets like these are often called ‘plant and machinery’, but you can also claim on non physical assets like:

• Renovating business premises in disadvantaged areas of the UK.
• Extracting minerals.
• Research and development – if it’s to advance technology in your industry.
• ‘Know-how’ (intellectual property about industrial techniques).
• Patents – if you pay to patent an invention.
• Dredging
• Structure and buildings – if you build, buy or lease a structure.

To claim capital allowance on an asset, you need to know it’s value. This is usually fairly simple, as it’s normally just the amount you paid for it. 

If the asset was a gift, or you already owned it before using it for your business, then you use the market value (how much you’d get if you sold it today).

Business expenses are any running costs that are wholly and exclusively for running your business. This includes:

• Office costs – like stationery or phone bills.
• Travel costs – like fuel, parking, and train or bus fares.
• Clothing expenses – like uniforms or protective clothing.
• Staff costs – like employee salaries or subcontractor costs.
• Things you buy to sell on – like stock or raw materials.
• Financial costs – like insurance or bank charges,
• Costs of your business premises – like example heating, lighting, business rates
• Advertising or marketing – like website costsf
• Training courses related to your business

For example, if you hire a private accountant to help set up your business’ accounts or prepare your financial records, the accountant would be classed as a subcontractor. So paying them would count as a staff cost, and it’d count as a business expense. 

There is often confusion about what counts as a business expense, so let’s look at some common examples of things that don’t count. 

Most of your assets will lose value over time, it’s unavoidable. Because it’s unavoidable, you can’t claim the loss in value. 

Although, if the asset loses all its value, you can make a ‘negligible value claim’.

Dividends are seen as bonuses, rather than employee wages. They’re more of a reward for investors, so they don’t count as a necessary business expense. 

Some business entertainment expenses are, but only if they’re provided for employees. So any dinner, drinks, or accommodation you provide for clients (or potential clients) cannot be claimed. 

In a similar vein to entertaining clients, any gifts or discounts you give your customers doesn’t count as a business expense because. It may be a great way to reward your customers, but it’s not a necessary cost. 

Some legal fees are deductible; anything associated with loans, patents, and trademarks that are necessary for your business. But, generally speaking, most legal fees are not. 

While they are technically a cost of running the business, they can’t be claimed. Fines and penalties are given for breaking rules, and breaking rules is not considered a necessary cost of doing business. 

Claiming tax relief will be a little different depending on whether you’re self-employed or running a limited company. 

You can claim relief on corporation tax when preparing your accounts for a company tax return.

You record your business expenses when completing your self assessment tax return. 

In both cases, you’ll need to keep detailed records of all your business’ financial information. A lot of businesses make things easier with accounting software, like Countingup. 

The Countingup business current account makes it easy to manage all your financial data in one simple app. The app comes with free built-in accounting software that automates the time-consuming aspects of bookkeeping and taxes. 

With receipt capture and categorisation features, you can instantly record and automatically categorise any business expenses you make, like accounting costs. 

You’ll receive real-time insights into your cash flow, profit and loss reports, tax estimates, and the ability to create invoices in seconds. 

You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags or inaccuracies. Seamless, simple, and straightforward.

Find out more here.