Subsistence Expenses Explained

The majority of business owners do their best to optimise their taxes. One aspect of tax planning is to ensure that you are including all of your correct business expenses in your accounts. As everyone on the planet spends money on food, not to mention the fact that ecommerce business owners have a tendency to spend a lot of time in coffee shops, we find that we receive a lot of questions on the subject. This article aims to explain some of the rules on subsistence expenses and what you can or cannot claim through your business.

IMPORTANT: Before we begin we would like to highlight that in general, subsistence costs aren’t allowable business expenses, so, in general, should not be put through your business (sorry!).

What is Subsistence?

In accounting, the word subsistence is used to describe any transactions that relate to the consumption of food and drink. For example, if you purchase coffee for the office or pay for lunch for a client, these would be known as subsistence expenses.

General Rule

The general rule (the one that usually applies unless specific conditions are met) is that subsistence expenses are not allowable expenses for tax purposes.

See HMRC guidance here.

Why are subsistence expenses not allowable?

Expenses are only tax deductible if they are wholly and exclusively necessary for the business's operations. Therefore the logic behind not allowing subsistence costs is that these expenses are typically part of the normal costs of living and so are not incurred for the purpose of trading.

Case law to support this can be found in Caillebotte v Quinn [1975] where it was said that the taxpayer ate to fulfil their human needs, rather than those of the business. This is compared to the cost of tea consumed by an actor playing the Mad Hatter drinking tea at his tea party. In this case the expense would be allowable as the drinking of the tea is necessary for the performance of the show, rather than for quenching thirst.

Occasional Journeys outside the normal pattern of work

There is a rule that subsistence (and travel) expenses are allowable, for reasonable costs, where certain conditions are satisfied. These conditions are:

1. The trade is an itinerant trade (see below) at the time the expenses are incurred, or;
2. The trader does not have to travel to the place more than occasionally in the course of the trade and either:
   a. The travel concerned is not part of the trader’s normal pattern of travel in the course of the trade; or
   b. The trader does not have such a normal pattern of travel.

What is an itinerant trade?

An itinerant trade is a trade or business that can only operate from specific sites or locations. Essentially they are those where the trader needs to travel from their home to different locations in order to be able to work on a certain job.

The primary example of an itinerant trader would be a builder working on a construction site. Although the builder can work anywhere in the world, technically, they can only carry out their trade on an actual building site. Once the construction has finished on that site, they will move on to work on the next site, wherever that may be.

As the majority of ecommerce business owners work from their laptops, they have the freedom to work from anywhere in the world (with a wifi connection). In fact, those without a formal office often tell us that they like to leave the house and will work in coffee shops or pubs to soak in the atmosphere (or escape from their kids!).

However, the ability to work from anywhere and then choosing to work somewhere, such as the local coffee shop, is distinctly different to only being able to work in a specific place. 

Because of this, we (unfortunately) believe that in general, ecommerce businesses do not meet the definition of an itinerant trade and so cannot reclaim any costs of subsistence from their taxable profits.

When can you reclaim subsistence expenses?

While ecommerce businesses aren’t typically itinerant traders, there are still times where they CAN reclaim subsistence (food and drink) expenses.

When you are making a genuine business journey outside of your normal business pattern you can allow for a deduction for any reasonable expenses incurred.

What does this mean?

Most people go to work and then come home in the evening. If they were self employed then this journey to and from work would not be a deductible business expense. However, if they needed to visit a client or supplier, or something else unusual, then travelling to this unusual place would be considered a break in their normal pattern of business.

With ecommerce businesses owners, if you usually work from home, then working from a coffee shop or another location occasionally is not enough for it to be considered a break in your normal pattern of business.

Examples of such journeys may include:

• Attending industry related conferences or meetups
• Attending a face-to-face seminar about ecommerce
• Visiting suppliers or trade shows
• Visiting your accountant
  

In these examples, as each of these journeys are needed for the businesses operations, but are not part of the normal business pattern, then travel and any subsistence can be reclaimed so long as it is deemed reasonable.

What is “deemed reasonable”?

Unfortunately, this is a question without an exact answer as HMRC will not define what they deem to be reasonable. This makes sense because if they wrote this down it would almost definitely be open to abuse. Instead, the onus of the decision is left with the taxpayer.

Although the responsibility is with the taxpayer, at Ecommerce Accountants we only allow our clients to reclaim costs that we feel are genuinely reasonable. If we see an expense that we feel is unreasonable then we will highlight this to you and will remove them.

The reason that we apply our own test of reasoning is that we believe that, as our client, you are engaging us for our expert judgement. It is easy to say an expense is allowable, however, it is more difficult to say why it isn’t and give the correct reasoning.

Here is a brief list of what we believe are reasonable and unreasonable subsistence expenses.

Examples of UNREASONABLE expenses:

• Having a bottle of champagne with lunch while visiting a supplier
• Staying at a luxury hotel and spa while visiting your accountant
• Having a three course meal and alcoholic drinks after a seminar with some of the other attendees

Examples of REASONABLE expenses:

• Having lunch and a small glass of wine while visiting a supplier
• Having a coffee and a pastry while visiting your accountant
• Having lunch and a soft drink with the seminar members in between talks

What do Ecommerce Accountants recommend?

We have heard that some accountants recommend putting through as many expenses through the business as possible and then leaving it to them to apply their judgement. At Ecommerce Accountants we recommend only putting genuine business expenses through your company. 

The reason for this is that if you are able to show that you do only put genuine expenses through the business, HMRC are much more likely to accept your version of events. For example, if 85% of your coffees are personal and you put all of those through your personal account, then if HMRC query the occasional coffee (the 15% through the business), you will be able to show that you have a track record of taking care to only claim things that you feel are reasonable.

However, if you put 100% of them through, and we arbitrarily remove 15%, it looks less like you have taken reasonable care and so HMRC are much more likely to remove all 100% of the subsistence.

What happens if I include personal expenses by mistake?

If you are a client of ours and you include transactions that are personal within your business account by mistake, we will attribute these to your directors loan account. This means that there is no tax advantage by attempting to put through incorrect expenditure through your books.

NB: In fact, there is likely to be an additional cost as it will be increasing the amount of bookkeeping work needed.

Still not sure?

We appreciate that it might feel difficult, especially as there is no concrete guidance. However, the best rule of thumb is to ONLY attempt to claim subsistence when you are genuinely on a business trip that is outside of your normal course of travel. If in doubt, always check with your accountant.