Tax adjustments for private use – business profits

When calculating taxable business profits (in particular sole traders & partnerships) an adjustment needs to be made in the tax computation for when an expense or an asset is both incurred/used for personal and business purposes. This is because HMRC only allow full tax relief when a cost is incurred ‘wholly and exclusively’ for trading purposes.

Common examples where adjustment may be required for private usage would include motor costs, utility bills (when a home is used for work purposes) as well as capital allowance claims on assets used that are partly used outside of the trade.

For example, suppose a sole trader uses a piece of equipment in their business (such as a computer), but 20% of the time they use this asset for private purposes. It would mean that the capital allowances total used in calculating taxable profits would need to be restricted by 20% to reflect the non-business usage.

HMRC campaign

HMRC will be running a digital campaign in the coming months to highlight the potential errors associated with required private use adjustments. Following a trial in 2024 involving 600,000 self-assessed individuals who were encouraged to make accurate private use adjustments, HMRC reported widespread inaccurate reporting of disallowable private use. As a result, they are looking to open more enquiries where they feel private usage may have been inaccurately recorded in previous periods.

If you have any further questions regarding this article, please contact Joe Wilson on 023 8046 1237 or email Joe Wilson.