Understanding Business Expenses and What You Can Claim

When you’re running a business, expenses are an inevitable part of the journey. From supplies and travel to equipment and utilities, most business owners spend money to keep their operations running smoothly. But understanding what counts as a business expense and what you can claim for tax purposes is essential to managing your finances effectively.

What Are Business Expenses?

Business expenses are the costs you incur in the day-to-day running of your business. When you claim an expense, you’re telling HMRC that this cost was necessary for your business. These expenses are then deducted from your total income to calculate your taxable profit.

For example, if your business earns £50,000 in income and you’ve claimed £10,000 in allowable business expenses, you’ll only pay tax on the remaining £40,000.

It’s important to note that claiming an expense doesn’t mean you get a refund. It means you reduce your taxable profit, and therefore, the amount of tax you owe.

The ‘Wholly and Exclusively’ Rule

Not every cost recorded in your profit and loss account is automatically allowable for tax purposes. HMRC’s key test is whether an expense is “wholly and exclusively incurred” for the purposes of your trade, profession, or vocation.

This means that the sole purpose of the expense must be business-related. If there’s any personal or non-trade element to the spending, the cost won’t be fully allowable for tax.

For example, if a self-employed consultant travels to an overseas project location and decides to combine this business trip with a holiday, the portion relating to private use can’t be claimed. 

Incidental Benefit

A necessary expense may provide a benefit in the traders own personal capacity. For example, during a work trip overseas the trader, in the course of their business activities, may meet interesting people or travel to desirable destinations. 

This is known as an ‘incidental benefit’. An expense is not disallowed because the trader obtains an incidental benefit – as long as the thing resulting the incidental benefit was undertaken entirely for business purposes.

Apportionment and Mixed-Use Expenses

In some cases, expenses are shared between business and personal use. Common examples include mobile phones, vehicles, or working from home. In these situations, you can claim only the business-related portion of the cost.

HMRC expects any calculation to be “fair and reasonable” and you must be able to justify how you arrived at the figure if asked.

Example: Working from Home

If you use one room in a four-room home exclusively as an office and your annual electricity bill is £1,120, you might divide the cost equally between the rooms. This means you could claim £280 (£1,120 ÷ 4) as allowable expenses.

If you only work from home one day a week, you’d then apportion this further, claiming £40 (£280 ÷ 7) as the allowable portion for business use.

You can apply similar methods to other household expenses such as heating and electricity, council tax, mortgage interest or rent, or internet and telephone costs. 

The key is to be consistent and to base your calculations on a logical method. The help of an accountant is something which can make this process much easier, especially when trying to balance all your other responsibilities that come with running a business. 

Recording and Claiming Expenses

To claim expenses, you need to keep accurate records throughout the year. This includes receipts and invoices, bank statements, mileage logs (for vehicle expenses), and details of any apportionment calculations. 

When you complete your annual tax return, you’ll report these totals to HMRC. Keeping clear, detailed records will help ensure you claim everything you’re entitled to and provide evidence if HMRC ever requests it. 

Ultimately, understanding and correctly claiming business expenses can make a real difference to your bottom line. It ensures you’re paying the right amount of tax and not missing out on legitimate deductions.