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Are expenses needed?

Are expenses needed?

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Hello,

As the title says are expenses needed. I have a limited company and am the director, I understand after reading on here allowable expeneses lower the overall profit which in turn reduces your overall corporation tax bill.

My question is should i expense items for the business if i dont really too as my understanding is im just taking money out of the business. For example say my overall profit was £50,000, corporation tax at 19% = £9500. Now if i bought an item for the business which i could in actual fact do without but is a allowable expense, say a laptop as an example for £1000, this would reduce my corporation tax to £9310 (50,000-1000) x 19%). So i saved £190 on tax but spent £1000 when i didnt need to. 

The way i understand it is if i dont have to expense anything i shouldnt as i end up taking more money out of the business and saving less on tax. Can anyone help me with understanding if this is the right way of looking at this please.

Thank you in advance.

Replies (5)

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Psycho
By Wilson Philips
09th Feb 2020 22:38

It’s basic common sense. It is pointless spending money for no reason other than to reduce tax.

But I would suggest that your comments indicate that some money spent on professional advice would be money well spent.

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By SXGuy
10th Feb 2020 06:11

So you understand the concept of not spending money you don't have to.

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Replying to SXGuy:
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By Tax Dragon
10th Feb 2020 06:47

That puts her ahead of one of my former clients (whose comments would be worthy of a slot on the current thread about such mattets).

Hidden away here is an important technical point, second nature to experienced tax hands like you, but maybe less so to the public. An expense is deductible from employment income only if there is a specific rule permitting the deduction or, failing that, if it is wholly exclusively and necessarily incurred in performing the duties of the employment. No need for the expense, no deduction for it. The OP asks about trading profits. The test there, as you know, is that the expense was incurred wholly and exclusively for the purpose of earning profits. A deduction may be obtained even if the expense was not needed.

Having said all that, I vote with you and Wilson for paying tax over incurring avoidable trading costs.

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Replying to Tax Dragon:
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By SXGuy
10th Feb 2020 10:28

I agree. I've lost count of the times a client has said, oh that tax is high, can't I just go buy a laptop or something.

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RLI
By lionofludesch
10th Feb 2020 06:59

It's not about paying as little tax as possible. It's about maximising the cash available for you to spend on yourself.

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