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All about apportionment. By Nichola Ross Martin

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17th Nov 2008
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Nichola Ross Martin, of the Practical Law Company considers when traders can claim a part or proportion of an expense.

In business you tend to incur costs for one reason – for the purpose of the business. Some expenses are incurred for more than one reason, and if you can identify part or a portion of them which relates wholly and exclusively to your business you can claim part of the expenses for tax purposes.

If you are self-employed, make a claim for the full cost of the expense in your accounts and then add-back the non-business proportion to disallow it in your tax calculations.

If you are trading through a company the position is slightly more complicated. An expense may be disallowed if it is incurred for the private purposes of any employee or director, although in practice, it would be taxed as earnings or as a benefit in kind, and the full cost to the employer of expense plus National Insurance would be deductible for tax in the employers’ accounts as employee remuneration.

Whichever way you trade, some expenses are incapable of apportionment and are automatically disallowed for tax, and most perplexingly, others, although incapable of apportionment, are specifically allowed by HM Revenue and Customs (HMRC) for tax.

How do you apportion expenses?

It should really be obvious, as if you can measure how much you use of something, you can surely apportion it. This is often how it does work in practice, and classic tax case law over the years has established that you cannot apportion some of the basic human necessities such as food, drink and clothing because you cannot separate the use of such things between business and the private requirements of being human.
More strictly though, you should look at each expense and ask why it was incurred - don’t forget that some part of it should be “wholly and exclusively” incurred for business. Ask yourself what was the primary motive behind the expense, and if there was more than one, how much weighting should there be for the personal aspect, and how much should be disallowed.

Many expenses are incurred primarily for business purposes and any private use or benefit is merely co-incidental. If so there is no add-back for private use, unless of course you can actually measure that part of it. This is not an exact science, it is a question of judgement.

How much can you claim?

You need to have incurred the cost to claim the expense, and you need to have some voucher or receipt to prove it. What part or proportion you claim will depend on the expense in question. These are some suggestions as to how you might claim or apportion some expenses:

  • Use of home: this expense is a combination of various expenses, based on the amount of time you work at home, the space you use and the use to which you put it. Apportionment is covered at some length here
  • Motor expenses: the simplest method is to keep a mileage log if you are driving yourself, but if you have receipts and other evidence to prove the journey you could complete this at any stage afterwards.
  • Travel: if your journey is for mixed purposes then you need some evidence to prove your intent. If you are going to claim that a trip to a foreign holiday location is all for business it certainly helps to have made a sale or two at the time. You might encounter problems if your family accompanies you, but you should be able to at least apportion your trip by time in days or hours.
  • Telephone and internet: most people do not try and attempt to itemize their phone bills these days. It depends on you and whether you can obtain itemized bills at no extra cost. If in doubt apportion telephone expenses using your judgement.

“Unapportionable” expenses:

These expenses are all or nothing: either the cost is wholly and exclusively incurred for the purpose of the business or it is all private.

  • Unusual clothing: if you are a self-employed actress you can obtain a deduction for your “red carpet” gowns, that is if you have to pay for your own gowns. This concession likewise applies to actors and variety performers who can claim the cost of their tailoring when performing to the public. The reason for this apparent bend in the rules is that your clothes are treated as if they are a costume or uniform, and as the primary motive of dressing up is taken as being for business, and the private benefit cannot be possibly calculated then you receive a full deduction for tax. In principle this should apply in the case of any special clothing, such as specialist sportswear and protective clothing, but not everyday clothing such as suits or normal work wear.
  • Food and drink when travelling: you cannot apportion food and drink, but when you incur the cost of it as part of a business trip it is all allowable. This point is raised in this recent article.
  • Animals: well, cat’s are not allowable for tax, as we have been over in Any Answers, you cannot ap-paw-tion them. The position might be different for guard dogs. Theoretically you could split the upkeep of Rover between hours on duty as security and being a family pet. Whether you would really want a proper guard dog as a family pet is another matter.

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By ianmckechnie
19th Nov 2008 19:16

Apportionment
I missed the cat discussion and the wonderful puns the first time round (unfortunately).

However, I don't agree that cats are never allowable : farm cats are clearly pest control and their costs should be claimable.

The position is definitely different for guard dogs - I did have the discussion some years ago with a tax Inspector - the deciding argument was "If you think it's a pet, you can pat it on the head - and I'll tell them at the inquest what happened".

PS - Useful article, thanks.

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By jbrameld
19th Nov 2008 18:37

telephone expenses
I was very interested to read about apportionment, particularly regarding telephones and internet. Thatnks for an interesting article.

I believe it is true that an employer can provide a fully expensed mobile telphone for an employee for no BIK, however my accountant tells me that the contract must be in the employers name. Furthermore he tells me that my claiming the costs of my mobile phone bills is a taxable benefit, despite the fact that recent analysis of itemised call lists show that 96% of the time used in the minutes bundle is on business calls. I frequently (2-4 days per week) work out of the normal office on several project sites and communication is important. He advises that claims can only be made for separately identifiable business calls which means that any calls in the minutes bundle are not allowable on a pro-rata basis. The only way round this is to have a very low inclusive minutes tariff, with itemised billing and provide an analysis every month. Is this correct? This would mean a more expensive option all round is required just to get round the silly tax laws, or is it reasonable to claim 96% of the bill? I thought HMRC abolished the BIK and requirement for bill analysis as the burden was too great.

I have a similar situation with home telephone and internet as I frequently work from home, sometimes at odd hours as project requirements dictate.

Does anyone have experience of apportioned claims of minutes within a bundle being allowed for an employee? Is it different for a director?

Thanks for an interesting article - all opinions gratefully received.

Jason

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