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What are Allowable Business Expenses?

What are Allowable Business Expenses?

Matthew Grief

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If you’re a sole trader running a small business, it is safe to say that you’ll be incurring business expenses. The good news is that many of the costs incurred for products or services that help keep your business running are deductible from your income when calculating your taxable profit and therefore reduce your potential tax bill.

However, there are some exceptions and restrictions to be aware of, to make sure that you not falling foul of the tax rules.

Am I eligible to claim?

Most small businesses can claim tax relief for allowable business expenses, providing the purchase is for a product or service that is ‘wholly and exclusively’ used for business purposes.

You can deduct allowable business expenses to work out your taxable profit. For example, if your turnover is £40,000 and you claim £10,000 in allowable expenses, you will only pay tax on the remaining £30,000. This is known as your taxable profit.

If a cost is incurred that has a ‘dual purpose’ i.e. has both business and personal uses, you will only be able to claim for the business cost element. For example, if your phone bill for the year totals £100 and 30% of the usage is for business calls and 70% for personal calls, you may only claim for £30 of business expenses i.e. 30% x £100.

For limited companies, the rules are slightly different. In those circumstances you deduct any business costs in full, from your profits, but you must the also consider reporting of any personal use via the P11D system.
If you are a sole trader or partnership, for certain types of costs you can opt to use HMRC’s simplified expenses method, which calculates the cost of certain business expenses using a flat rate approach.

As an alternative to claiming for actual business expenses incurred, you can instead claim up to £1,000 allowance against the business turnover.  This is called the “Trading Income Allowance”.

What are allowable business expenses?

The following items are all examples of allowable business expenses (this list is not exhaustive):

  • Office costs ­– stationery, postage, phone bills, IT maintenance etc.

  • Costs of business premises – utility bills and rent. This does not include any costs associated with buying property.

  • Travel costs – fuel/mileage cost for qualifying business travel, parking, train tickets. Costs related to “ordinary commuting” would not be deductible.  

  • Staff costs – salaries paid to staff, pension contributions, bonuses, qualifying expenses and staff entertainment.

  • Clothing costs – uniforms or protective clothing. This does not include clothing that would be worn ordinarily for general decency and warmth.

  • Legal and financial – insurance policies, hiring the services of an accountant, solicitor fees and surveyors’ charges (in particular circumstances).

  • Advertising and marketing costs – printed adverts, leaflets, or the cost of maintaining a website

  • Items that you only buy to sell on – raw materials, stock, or merchandise.

If you’re self-employed and work from home, you may also be able to claim a proportion of your household costs for things like utilities, council tax and mortgage interest or rent. However, you will only be able to claim for what is used for business purposes.

What business expenses can’t I claim for?
The following items are not considered allowable business expenses:
  • Acquisition of a business premises – includes the purchasing of a premises and any associated legal fees (although you may be able to claim the structures and buildings capital allowance).
  • Non-work related travel – non-business-related travel costs, motoring fines, travel between home and work.
  • Everyday clothing – this includes suits, jeans, trainers, etc.
  • Non-business staff expenses – carers or domestic help including nannies.
  • Goods for own use – any goods or materials that are consumed/taken for private use.
  • Depreciation of equipment (the capital allowances position would be reviewed and claimed instead).
  • Customer entertainment – entertaining clients, suppliers, customers, and event hospitality.
  • Donations – whether they be to registered charities or political parties (personal tax relief would instead be available under gift aid on any charitable donations).
  • Training courses – training courses that are not directly related to your business or for acquiring new knowledge to start new business ventures.
 
How do I claim allowable business expenses?

You should keep records of your business expenses throughout the year. When completing your Self-Assessment tax return, you will need to provide the total amount of allowable business expenses. Although you do not have to provide proof when completing the tax return, it is a statutory requirement that business records are kept. Therefore, you should ensure that records are kept to support the claim should HM Revenue and Customs raise any enquiries into the tax return.

It should also be noted that Making Tax Digital for income tax is currently scheduled to apply from April 2024 for self-employed individuals with turnover more than £10,000.  In very simple terms this introduces the requirement to keep digital records and report information quarterly to HMRC.

If you’re unsure if a business expense is allowable for tax purposes or not, please contact your local Moore advisor.  

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