Is it true?

1072760

Just a quick question if anyone could help - does 'tax-deductible' REALLY mean 'gross profit deductible' for the self-employed because if it does it means i pay for 70% of my expense from my net profits - all hail, Gordon Brown!:eek:

fengirl_2

This is making my head ache!
You deduct all business expenses from your gross takings and this reduces your profit, so reducing the tax due. If you pay £100 for stationery, this reduces your profit by £100, so reducing your tax bill by £20 (or £40 if you are a higher rate taxpayer). So the stationery has cost you £80.

Elaine_Wilson

No

I sometimes use the phrase 'allowable deduction for tax purposes'. It often needs explaining to clients, though.

I think most self-employed persons appreciate that you do not get all the expense costs paid by HMRC. The misunderstanding seems more prevalent with employees claiming for things such as professional subscriptions.

trevormax

Elaine_Wilson wrote: »

I sometimes use the phrase 'allowable deduction for tax purposes'. It often needs explaining to clients, though.

I think most self-employed persons appreciate that you do not get all the expense costs paid by HMRC. The misunderstanding seems more prevalent with employees claiming for things such as professional subscriptions.

and mileage when an employer pays less than the HMRC rate of 40p/mile seems to be another one.

Ste_C

fengirl wrote: »

This is making my head ache!
You deduct all business expenses from your gross takings and this reduces your profit, so reducing the tax due. If you pay £100 for stationery, this reduces your profit by £100, so reducing your tax bill by £20 (or £40 if you are a higher rate taxpayer). So the stationery has cost you £80.

But can he claim the £100 back from the tax man? And if he can claim it back, does this not increase his profits by £100, thus increasing his tax bill?

dzug1

No

Ste_C wrote: »

But can he claim the £100 back from the tax man? And if he can claim it back, does this not increase his profits by £100, thus increasing his tax bill?

No he can't claim the £100 back from the taxman. He can claim the TAX on £100 back. Or rather his tax bill is reduced by the equivalent amount.

fengirl_2

This is why, when someone asks on here 'what can I claim now I'm self employed', I always reply that you cannot claim anything.
It needs to be emphasised that anything you buy reduces your profit and therefore your tax. The government does not pay you for your purchases or expenses!

Ste_C

dzug1 wrote: »

No he can't claim the £100 back from the taxman. He can claim the TAX on £100 back.

Whoosh! Right over your head.

And even then, you're still wrong.

fengirl_2

You can't claim back what you havn't paid!

Money_Grabber13579

No

Ste_C wrote: »

Whoosh! Right over your head.

And even then, you're still wrong.

No, you're wrong. If you pay £100 for stationary, you can't claim the full £100. The government doesn't pay for all your paper, pens etc. It's what is called an allowable expense, so is removed from the profit. It doesn't have to be added back because it's already accounted for in the trading profits.

If the expense wasn't allowable, for example embezzlement by a director, this wouldn't be allowed and so would have to be added back. This is because it was taken off profit when it shouldn't have been,

trevormax

Ste_C wrote: »

Whoosh! Right over your head.

And even then, you're still wrong.

Actually he is correct.

For example, if you do 100 busines miles and your employer doesn't pay you expense payments, then you claim 40p per mile from HMRC but you will only get the tax back on the 40p per mile, not the full 40p per mile.

The same applies to when people reduce their profit because of allowable expenses. If you spend £100 on stationary you reduce your profit by £100. Therefore you pay tax on £100 less of your profit which at 20% means you save £20. You don't pay £100 less tax.