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Dear tutor,
I have a question and hope you can help enlighten me.
I am not sure if I understand the 2 mentioned below regulations in a wrong way, but I feel a bit confused and uncertain:
1. In unincorporation tax, only expenditures that are wholly and exclusively for the trading purposes are allowable. From this, I understand that any expenses that are for private use are not allowable.
2. In corporation tax, it’s said and I quote: “There are no private use restrictions for companies: any private expenses of a director or employee of a company are fully allowable, when calculating the tax adjusted trading profit.” => I am feeling confused with this because in reality if I am not going to book a random invoice handed over by an employee if that expense is for his personal purpose.
I am not sure if I misunderstand the concept of wholly and exclusively for trading purpose and get it twisted with private use concept, but hope to receive an explanation from you over them.
Thank you in advance!
First of all, there’s no such thing as ‘unincorporation tax’; I think you mean income tax on unincorporated businesses such as sole traders and partnerships.
For both unincorporated businesses and companies, there are never any private use adjustments for employees, as staff costs are allowable expenses for the employer. The employee may suffer an employment income charge on anything they get from the employer (cash, benefits etc).
The ‘wholly and exclusively’ test in order for expenses to be deductible against trading profits applies to both unincorporated businesses and companies.
The point is, is that an unincorporated business is not legally separate from the owner(s). The profits on the business are taxed on the owner and private use adjustments are made to make sure that the profits reflect the profit made by the business and that the owner is not putting his personal expenses through the business.
A company is a separate legal entity, and everyone who works for the company is an employee, even if there is a single shareholder who is also the only employee. As the company is a separate taxable ‘person’, a company cannot drive a car, use a computer etc, so there are never any private use adjustments when calculating the trading profits of the company.
Thank you for your reply.
From what you wrote, I can understand that in both cases, private expenses are never allowable, only business-related expenses are.
But why in the text book, it’s said “There are no private use restrictions for companies: any private expenses of a director or employee of a company are fully allowable, when calculating the tax adjusted trading profit.”
How can I understand it correctly? Or is it not correct?
As stated above:
Employee costs are allowable expenses for a business, whether that business is a sole trader business/partnership or a company. The employee will be taxed under the employment income rules for anything received from the business.
A company is a separate legal entity, and everyone who works for the company is an employee, even if there is a single shareholder who is also the only employee.
A company cannot drive a car, use a computer etc, so there are never any private use adjustments when calculating the trading profits of the company.
As everyone who works for the company is an employee, there are never any private use adjustments for employees, as staff costs are allowable expenses for the employer.
There are only ever private use adjustments for unincorporated businesses (sole traders/partnerships) and the adjustments would only apply to the owner(s) of the business, not employees.
Thank you.
I understand that there is no personal private use adjustment for companies.
But you wrote “staff costs are allowable expenses for the employer”. Normally, I can understand that staff costs are anything that incurs at work, on business trip and so on, such as office consumables, employee consumables, travel and subsistence etc.
But I do not think staff costs include their private costs such as his private Apple subscription or Netflix subscription, does it?
How can I understand correctly of your definiton of staff costs?
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