Business expenses are part and parcel of running a business. They are the costs that businesses incur in order to make sales. The good news is that most of these business expenses are tax allowable so can save business owners money on their tax bill.
In this guide we explain the rules for business expenses and which business expenses are tax allowable. We also answer common questions like “what records do I need to keep for business expenses?” and “What happens if I use something for business and personal use?”
Table of Contents
- What are business expenses?
- Frequently asked questions?
What are business expenses
Business expenses are any necessary costs you incur as part of the business. They will be deducted from your turnover at the end of the year on your accounts or self assessment tax return to provide your overall profit figure. Business expenses include things like staff costs, stock purchase costs, rent and interest on business loans.
How do business expenses affect my tax bill?
If you’re a business owner you can deduct any tax allowable costs to work out your taxable profit. This taxable profit is used to calculate your business's or personal tax bill. That means it’s important to keep records of all your tax allowable expenses to help minimise the tax you pay.
For example, if your business has turnover of £50,000 and you spend £10,000 on tax allowable expenses then your taxable profit will be £40,000. This figure will be used to calculate any tax owed.
What business expenses are tax allowable?
Most common business expenses are tax allowable. Here are some examples of business expenses that are usually tax allowable:
- Premises costs - including renting an office, retail space or warehouse and business rates.
- Office costs - including office furniture, IT equipment, stationery, phone bills and utility bills.
- Fuel costs - the business mileage allowance rate is currently 45p per mile for up to 10,000 miles per year. That means self employed business owners can claim up to 45p per mile as a tax deductible expense if they’ve used their car for business travel.
- Other travel expenses - including parking tickets, public transport costs, vehicle leasing costs and hotel bills.
- Uniform costs - normal clothes usually aren’t tax deductible.
- Staff costs - including salaries, employer pension contributions, paying contract staff and payroll processing costs.
- Purchase costs - including buying stock, raw materials costs and essential repairs on equipment.
- Financial costs - including business insurance and bank charges and loan interest.
- Advertising and marketing costs - including the cost of running a website.
- Training costs - including refresher courses or staff training days.
- Professional fees and other service costs - including accountancy fees, IT servicing costs and cleaning services.
- Working from home costs - self employed business owners can claim up to £6 per week to cover working from home expenses without providing receipts. If you want to claim more than this you will need to provide evidence of your costs.
- Magazine subscriptions, professional journals and business books - these can be claimed as a tax allowable expense if they are relevant to your business’s trading activities
- Staff entertaining - you must be entertaining employees rather than contract staff. The rules around staff entertainment are complex. Ask your accountant if you’re not sure if something is a tax allowable expense.
Some of these expenses can be reduced if a business can hot desk.
What business expenses are not tax allowable?
Here are some common expenses that aren’t tax allowable:
- Private purchases - any money taken from your business to pay for private purchases is not tax allowable.
- Journeys between home and work - train tickets or fuel used for travel between home and work is not tax allowable.
- The private portion of any items used for both business and personal use - this is not tax deductible and you will need to work out a reasonable way to split the cost.
- Entertaining clients - perhaps surprisingly, the costs of client entertaining are not usually tax deductible because HMRC don’t view them as strictly necessary.
- Entertaining any staff that aren’t on your payroll - the costs of entertaining contract staff, potential staff or other company directors are not tax allowable.
- Asset depreciation - this is where companies record the loss in value of assets over time in their accounts. It isn’t tax allowable because it’s classed as a capital cost.
- Shareholder dividends - these can’t be claimed as a taxable expense as they are used to remunerate directors and other shareholders.
- Improvements to capital assets - you can’t usually claim for improvements to your building unless they are necessary repairs. Check with your accountant for details.
- Customer gifts - just like client entertaining, gifts given to your customers are not a tax allowable expense.
- Donations - these aren’t tax allowable, unless they’re donated through gift aid.
- Some legal fees - some legal fees are tax allowable, but others relating to an issue of share capital or the purchase of capital items (equipment and property) aren’t tax allowable.
- Fines and penalties - these are also not tax allowable.
Frequently asked questions
How do I keep a business expenses spreadsheet?
Keeping a business expenses spreadsheet is an easy and cheap way to keep track of your business expenses. You should keep a careful record of all your expenses, the date you paid for them and how you paid for them. This will make it much easier to match your expenses with your records when your accountant prepares your end of year accounts.
Should I have a business expenses credit card?
Some business owners choose to have a business expenses credit card. Many lenders will allow you to apply for multiple credit cards, so you can issue them to different staff members. It is also possible to have different spending limits for each separate business credit card.
Having a business expenses credit card will allow you to keep track of all your employee’s business expenses in one place. It will also mean that you don’t have to spend as much time dealing with expenses admin. You won’t need to reimburse employees for business expenses as they will be charged directly on the credit card.
The disadvantage of a business expenses credit card is that interest costs can be expensive. You may also have less control over your staff spending.
Take a look at our detailed article on business credit cards if you want to know more.
What records do I need to keep for business expenses?
You should keep paper or electronic receipts for your business expenses, as well as details of any capital assets purchased. It’s a good idea to find a filing system to organise your receipts as this will save your accountant time. It will also save you money and stress at the end of the year. You need to keep evidence of business expenses for at least 6 years in case HMRC wants to see them.
Are business expenses rules different for limited companies and sole traders?
Most business expenses rules are similar for limited companies and sole traders. There are slightly different rules on cars, mobiles phones and working from home. Ask your accountant for details.
Which travel business expenses are tax allowable?
Most travel business expenses are tax allowable although you can’t claim for travel between home and work. Parking or speeding fines also aren’t tax allowable. Here are some travel costs that are tax allowable for business travel:
- Fuel for business journeys (self employed business owners can claim 45p per business mile as a taxable expense)
- Car leasing costs
- Insurance for a business vehicle
- Parking costs and congestion charges
- Hotel costs and subsistence costs while staying away for business
- Train, taxi, plane, ferry and other similar transport costs
Are business entertainment expenses tax allowable?
Staff entertaining is usually a tax allowable business expense as long as you are entertaining employed staff members, rather than contract staff or prospective employees. Client entertaining costs are not tax allowable as HMRC doesn’t consider them to be a necessary part of business.
Can I buy a car as a business expense?
If you’re self-employed, you may be able to claim for the cost of buying a car using capital allowances. Ask your accountant for details. You can also claim for other costs associated with your car. The HMRC rules state that you can claim for costs including insurance, hire charges, repairs, fuel and breakdown cover. You can’t claim for any parking fines, speeding tickets, or travel between home and work.
Where can I find a list of business expenses?
There is a list of allowance business expenses on the HMRC government website https://www.gov.uk/expenses-if-youre-self-employed. If you’re self-employed, you can also contact the self assessment helpline if you’re not sure if an expense is tax allowable.
Can you deduct credit card interest as a business expense?
If you are a business owner then you can deduct credit card interest if the card is used for business use.
What can I claim as a business expense?
If you’re an employee, then what you can claim as a business expense depends on your employer's rules. Often employers will allow you to claim for fuel costs and accommodation and food costs while you are staying away for business purposes.
What happens if I use something for business and personal use?
If you use something for business and personal use, then only the part you used for business use will be tax allowable. For example, if you spend £300 per year on your mobile phone and £130 was spent on business calls, you can include £130 business expenses in your end of year accounts.
Can I claim business expenses if I work from home?
If you’re self-employed and you work from home you can claim business expenses on costs including heating, electricity, council tax, mortgage interest, internet and phone use. You will need to find a reasonable method to work out your expenses. For example, you could divide your costs by the number of rooms you use for your business and the amount of time spent working at home.
Is taxable profit the same as accounting profit?
If you have to prepare business accounts then you may find that taxable profit is sometimes different to accounting profit. This is because tax allowable business expenses may be slightly different to expenses according to accounting rules. Ask your accountant if you think this may affect your business.