For small business people, the separation between “allowable” and “non-allowable” expenses is complex. This guide aims to provide an overview of business expenses, with links to further resources which provide more in-depth information.
Generally, you can deduct from your turnover all costs incurred for the purpose of generating business profits, such as cleaning costs, utilities, business insurance, postage, office rental, and so on.
However, you cannot legitimately claim expenses for costs incurred for non-business activities. You can only claim expenses incurred, “wholly, exclusively and necessarily” in performing your business duties.
Many small business people may also claim expenses which are “dual purpose”, and part of these expenses can be claimed against the business. For example, you can claim the proportion of your personal phone bill relating to business calls.
In the end, what you can claim will depend on what kind of business you run – a fashion model may be able to claim for lipstick but not a builder!
There are differences between how expenses are treated between the sole trader and limited company business types, most notably if your company pays for something you benefit from as an individual (a benefit in kind).
The purchase of business equipment or premises cannot be counted as an expense. These items are dealt with by claiming capital allowances which can then be offset against profits.
Businesses can deduct a proportion of capital costs against taxable profits, although the rate varies according to what you are claiming for.
If you are purchasing business equipment (tools, computers, furniture, machines, etc.), the main capital allowance rate for businesses is 18%. Look up the latest rates here.
Most companies can claim an Annual Investment Allowance for expenditure of up to £200,000 a year, although this was temporarily increased to £1m during 2019 and 2020.
If you’re operating as a sole trader, and turnover less than £150,000, you may prefer to use a simple system – called cash basis.
Be careful though as the allowable rates for tax purposes do often change from year to year. Make sure you check the current rates before your accounts are finalised.
Benefits in Kind (for limited companies)
If a limited company pays for anything for the personal use of an employee or director, these expenses would typically result in a “benefit in kind” charge – i.e. income tax and national insurance (NI) for the employee and NI liabilities for the employer.
Using a business credit card to pay for such expenses can avoid the need for expenses to be reimbursed. You can also apply for a dispensation to cover reimbursement of expenses to employees (among other issues). This will save you reporting issues covered by the dispensation on P11D forms. It takes initial effort but anything that saves paperwork is good!
An employer must complete a P11D (Expenses and Benefits) form each year for every employee earning £8,500 per year or more (including benefits) and all directors. The P11D contains details of all expenses claimed by each employee/director during the tax year.
A similar form – the P9D is used for employees earning less than £8,500 per year. All completed P11D forms must be returned to HMRC by 6th July each year.
Repaying a director for business expenses has to be reported too, although you need to be careful to claim the cost on your tax return as well as recording the reimbursement.
Travel costs incurred wholly, exclusively and necessarily on company business can be reimbursed. However, travel from home to work is not allowed.
Traveling to a client site or temporary workplace can be claimed. According to HMRC, “a workplace is not a temporary workplace if the employee can expect to work there in a continuous period of work lasting 24 months or more.”
Additionally, via the fixed term appointment rule; “a workplace is not a temporary workplace if the employee can expect to work there in a continuous period of working lasting for all or almost all of the likely duration of the employment.”
If you use your own car for business purposes, you can claim 45p per mile (to a maximum of 10,000 miles) and 25p per mile after that – per tax year.
Motorcycle rates are 24p per mile, and Cycles are 20p per mile. You may also claim for parking costs and congestion charging, but not for any parking tickets or fines you may incur.
These rates have not changed since 2011. Check here in case they have changed since 2020.
As a general rule, the cost of staying away on business is a tax-deductible expense. The key thing to remember is that claims for expenses whilst staying away must be reasonable (i.e. meals, drinks, accommodation costs).
HMRC also provides a modest allowance for “incidental overnight expenses” of £10 for overseas stays, and £5 per night for stays within the UK.
However, you couldn’t claim for lunch while out of the office just for the day, as you’d have paid for this personally if you were working at your usual location.
Neither would taking a potential client out to lunch be tax-deductible. You might show it in the business accounts as a cost, but it would be disallowed for tax purposes.
Working from Home
As more and more people choose to work from home, the question of how you can reclaim any home office expenses is frequently asked. This is one of the issues most likely to be challenged in the event of a Revenue inspection.
Read our dedicated guide to claiming homeworking expenses.
Business Expenses & VAT
The rules for claiming business expenses are complex, however they become more so where Value Added Tax is involved. Beware that the rules are not always the same as when claiming expenses for income tax purposes.
Car expenses are a particularly tricky area and you should always ask for advice before purchasing or leasing a vehicle. For the purposes of VAT calculations, expenses are viewed as being “non-business”, “taxable” and “exempt”.
If you are registered for VAT, you can only reclaim the VAT on purchases which have been made purely for business reasons.
You can read more in our VAT section, or ask your accountant for clarification.
The rules relating to claiming business expenses are strict. You are also likely to collect a large number of expense-related receipts and documents over the year. For these reasons, it is essential that you keep accurate records in order to back up all claims you make when calculating both business and personal tax records each year.
Thanks to Ian Marlow at HfM Accountants for his contributions to this guide.
Last updated - 6th October, 2016