Last updated on April 13th, 2015 at 01:48 pm

As you know if you run a small business,  you can deduct expenses that are incurred “wholly and exclusively” for the purposes of that business when when you are working out the profits of the business so that you know how much tax to pay at the end of  the year.

However, what you may not know is that to be deductible as an expense, the item in question must be “revenue expenditure” rather than “capital expenditure”.

Whats’ the difference you may be asking, after all if you spend money on the business surely that is an expense and you should be able to get tax relief on it?

Revenue expenditure is usually day to day expenditure on services and supplies that you need for the business, for example stock, power supplies, stationery, advertising, rent and staff wages all count as revenue expenditure (http://www.hmrc.gov.uk/manuals/bimmanual/bim35005.htm)

Capital expenditure on the other hand is expenditure on significant assets that will typically be used by the business over a number of years such as the purchase of business premises or plant and machinery used in the business process and so on.

Having said that, the question arises that if you are repairing or maintaining your business premises what does the expenditure come under, revenue (so  you can claim the costs in tax relief) or capital (meaning that you claim the depreciation on the value of the asset (http://www.hmrc.gov.uk/capital-allowances/basics.htm)).

Where a business is run from dedicated premises such as an office, shop, workshop or factory, the expenses incurred in maintaining and running those premises are obviously incurred wholly and exclusively for the purposes of that business but you need to split any costs into running costs (power, rent, maintenance) or improvement costs.

Running costs / maintenance

Where the business is run from home, the costs of maintaining the property will have both a business and a private element. This means that the expenses need to be apportioned to determine the business element which could be deducted in computing profits. For example, if one room in a home with eight rooms ( a typical typical 4 bedroom house for example) is used for the business, it would be reasonable (and more than likely accepted by the HMRC) to deduct one-eighth of the associated premises costs. However you need to note that if a room is used solely for business purposes and no other use then when the home is sold  this room is excluded from the capital gains tax (CGT) private residence exemption and you may have to pay CGT on the increase in value of the room – it’s best to talk to your accountant about this as there will be other allowances that you may be able to claim.

In the past home based businesses have often either tried to work out the exact amount that they can claim for “use of home as an office” or have taken their accountants advice and claimed various amounts from £2 per week to £5 or more per week (depending on how much the accountant feels you could “get away with),  However the tax year 2013/14 onwards, new legislation will allow sole traders and partners in a partnership wholly comprising individuals to claim a fixed rate deduction where a business is run from home if  you want to. This is an simple alternative to working out the apportionment of actual costs and is probably something that many small businesses will be interested in after talking to their accountant.  This deduction is a set monthly amount that is determined by reference to the total hours spent in the home wholly and exclusively on business matters. This  is set at £10 per month where the hours worked is 25 to 50 per month, £18 per month where the hours worked is 51 to 100 and £26 per month where the hours worked is 101 or more.

Repair Costs

All properties need some on-going maintenance to sort out the wear and tear caused by everyday use, and premises used for the purposes of the business are no exception.

Tax relief is given for any expenditure on repairs as long as it is revenue in nature and incurred wholly and exclusively for the purposes of the business. As with all business expenses, the HMRC draws a distinction for tax purposed between a repair, which is revenue in nature, and an improvement, which is capital.

A simple way to wok out whether the money you are spending is a repair or an improvement is to remember that a repair is something that restores the original condition of the premises whereas an improvement enhances it.  Typical repairs include painting & decorating, mending something that is broken, fixing damaged roofs or windows, etc.

The cost of any repairs can be deducted when working out your profits thus giving you immediate tax relief on the expenditure.

If you decide that the money was spent on an improvement such as replacing windows with double glazed units or installing an air conditioning unit then you have to work out the depreciation on the asset each year and use this figure to reduce the profits of the business.  Again, your accountant will be able to explain the idea of capital allowances and depreciation and I suggest that you talk to them about this.

As always with any information you may read on the internet you should check with a professional adviser that the information applies in your case.  We hope that this information (which is correct at the time of writing as far as we know) at least gives you enough to be able to ask your accountant the right questions.