Does personal use of business AI tools put tax relief at risk?

Wholly and exclusively

An expense is only deductible in computing a chargeable profit/loss if it is incurred wholly and exclusively for the purposes of the trade. But what does this mean exactly? It means that the sole reason for incurring the expense must be to benefit the trade. That is, there must not be a “duality of purpose”, otherwise the expense is disallowed in full.

Example. The best example is that of Miss Anne Mallalieu, a barrister. She claimed expenses for buying black clothing that she was required to wear in court. The professional code of conduct of barristers requires that they wear such clothing. HMRC (successfully) argued that she did not only buy the clothes for wearing in court, she had another purpose which was that she needed to wear clothes to remain decent. The latter was not a business purpose.

Your intention at the time of making the purchase is key, i.e. you signed up to the AI subscription so you could use the tool to increase efficiency for your business. This is not the end of the matter though as we then have to consider the private use of the tool and decide whether the expense should be adjusted.

Incidental benefit

If you can show that any personal benefit is purely incidental, there is no need to adjust the amount claimed as the deduction should be allowed in full.

Example. Using the AI tool for admin tasks enables you to take a full lunch break each day, where previously you often worked straight through. This personal benefit to you is incidental and wouldn’t warrant an adjustment for private use.

Too personal?

If there is clear mix of business and private use, the expense should be split such that only an appropriate percentage reflecting the business use is deducted. Apportioning can be tricky with fixed costs such as a monthly subscription, but luckily HMRC will accept any method that produces a fair and reasonable result.

We would expect HMRC to treat an AI subscription in the same manner as telephone and broadband costs. That is, the fixed costs are apportioned based on usage and if private use is not significant, the expense should be allowed in full.

Example. Jack uses his new AI tool for 30 business tasks per day on average. He uses it for around 30 personal tasks per week. Jack is therefore using the AI tool 83% for business. If the cost is £500 per year, £415 can be claimed as a business expense with the remaining £85 disregarded for private use.

Alternatively, the adjustment could be based on the time spent using the tool. You should try different methods, and choose one that best reflects your circumstances.

Example. The facts are the same as above but Jack works out that the AI tool is used two hours per day for business and ten minutes per day personally. This may give a more accurate reflection of the business v private use, and results in 92% business use. The business expenditure is £460 using this method and would be accepted by HMRC as long as the result is fair and reasonable.