In general, a company's expenses depend on the type of business. If a company owns a restaurant, food expenses are common, but if the company provides IT services, it can't have food expenses. In other words, such expenses would not be considered activity-related and would be taxable. But how do you know which expenses a company can have and which can' t?
What does the law say?
The concept of business expenses is defined in paragraph 32 of the Income Tax Act.
Expenses are considered to be related to business activities if they:
- made for taxable income;
- serve to support or develop business activities and the link between the costs and business activities is clearly justified;
- if the costs result from the provisions of § 13 (1) of the Occupational Health and Safety Act. For example, the costs of monitoring the health status of an employee, first aid preparations, training and risk analysis.
How do I know if I can take an invoice to the company's expenses or not?
To figure out if you can take any invoice in your company's name and pay it out of the company's account, you need to answer the following questions.
1) Is it possible for me to use this purchase for selling my services or goods?
If the answer is yes and the relationship between the purchase and the income is direct, then such an invoice can be charged as a company expense.
Example 1. You buy an advertising service from a marketing agency. This is a direct correlation with your company's income, because by spending money on advertising, you will get more contacts of potential buyers.
Example 2. You pay for a hairdresser's services from your company account. Your logic might be like this: I need to look good for meetings with clients, so the expense for the hairdresser will be an expense for my company. Unfortunately, this is not a direct relationship, so such an expense cannot be taken as a company expense without incurring taxes.
2) If the answer to the previous question is no, you should ask the next question. Do these costs support the firm’s activities or develop them?
If the answer is yes and there is a direct link between the buying and the developing company or keeping the business activity, then such an invoice can be charged to the company's expenses.
Example 1. You have bought sales training courses for your employees. Here there is a direct correlation with the development of the activity. You can take such an invoice as an expense.
Example 2. You have bought Chinese language courses but you don't have any customers from China and you have never had any requests from China. In this case the connection to business development is not direct. You cannot charge such an invoice as an expense without paying taxes.
3) If the answer to the previous question is no, answer the following question. Is this invoice related to the health and safety of your employees?
If the answer is yes, then this invoice can be paid from the company account.
If no, it is not possible to pay this invoice from the company account tax free.
Example 1.You are sending an employee on a business trip and he needs to take a coronavirus test. You can pay this invoice from the company account as it is a requirement of the government without which the employee cannot fulfil his duties.
Example 2. You want to pay for plastic surgery from the company's account. In this case, the invoice for such services cannot be paid tax-free because the link to health and safety is not direct.
If the answer to all three questions is no, then such an invoice can’t be taken into expenses without incurring additional taxes from your company.