Expenses

Businesses pay tax based on the profit they have made.  Profit is the net result after deducting expenses.  Therefore, recording expenses is important because by doing so a business can avoid paying any more tax than it absolutely needs to.

There is no definitive list of what constitutes a tax deductible expense.  Instead an expense is tax deductible if it is incurred wholly and exclusively for the purposes of the trade, unless relief is barred by statute (business entertaining is an example of this).

So something that is a deductible expense for one business is not necessarily deductible if incurred by another business.  For example, a self employed person running a shop is likely to claim tax relief on establishment expenses, such as:-

(a) rent, rates and utilities;
(b) staff wages;
(c) motor expenses;
(d) shop repairs;
(e) telephone;  and
(f) stock purchased for resale.

He won’t get relief for drawings he takes from the business or his ordinary computing expenses.

Contrast this with a computer contractor trading through a limited company under his control.  His company is likely to claim tax relief on expenses such as:-

(a) salary payments to the computer contractor;
(b) administration expenses;  and
(c) travelling expenses reimbursed to the computer contractor for ordinary commuting (in some circumstances).

Such a company is unlikely to be able to claim tax relief on establishment expenses simply because they will be paid by the client to whom the computer contractor is providing services.

Businesses cannot treat capital expenditure as expenses, but a system of capital allowances operates to provide tax relief for many types of such expenditure