Businesses can subtract certain allowable business expenses from their turnover. Expenses will be deducted from the overall trading income to lower the final figure on which the business will pay tax.
This applies to both the self-employed and limited companies, and actually, business expenses are similarly defined and classified for both. In a nutshell, business expenses must be incurred “wholly and exclusively” for the running and operation of the business or trade itself.
“Wholly and exclusively” supplies a broad remit - allowable business expenses can include everything from bank charges to website development and hosting costs, and many simply don't realise what they can claim.
In 2021, Simply Business found that many small businesses were losing thousands due to unclaimed expenses, and as many as 81% of small business owners didn’t understand what a legitimate business expense even was. Some 2% of surveyed small businesses lost more than £10,000 in revenue through unclaimed expenses whereas a majority 35% lost up to around £499.
Whilst £499 in one year is not an earth-shattering loss, what about after 10, 15, or 20 years?
Allowable Business Expenses
There are many categories of allowable expenses permitted by HMRC. These range from fuel and travel costs to the cost of marketing the business, staff costs, business premise costs, banking fees and more. We’ll cover them in detail shortly.
In general, allowable business expenses are relevant strictly only to the business itself. If there is any crossover with personal expenses then this will not count. One example would be non uniform clothes purchased for the business, like a suit. Although used for the business, this wouldn’t be allowed as it can be worn outside of work hours.
The Difference Between Revenue and Capital Expenses
Most expenses are revenue expenses, i.e. expenses that last for a short-term or transient period of time. Some examples of revenue expenses include paper, or ink cartridges, hosting costs for a business website, etc. These last for a short period - they’re an ongoing expense.
Capital expenses, however, are intended to last for a longer period of time. Some examples of capital expenses include computers, cars or other vehicles. These are claimed instead as a capital allowance, and not a business expense, for those using traditional accounting. Those using the simpler cash basis accounting method can claim capital expenses in the same way as standard revenue business expenses.
Many businesses choose to use business accounting services to list and detail their expenses for submission to HMRC. Small business accounting in the UK is relatively easy as many small businesses will be able to use cash basis and simplified expenses.
Types of Business Expenses: UK (Bromley) Business Guide
Here is a breakdown of the main allowable business expenses permitted by HMRC. Note that each category is broken down in more specific detail on the HMRC website. If you’re unsure as to whether something falls into one of these categories then consult official guidance or ask a tax accountant.
1: Office Expenses
Office expenses cover all your usual expendable materials such as:
- Paper
- Printing costs
- Printer ink
- Stationery used for the business
- Computer software licenses and software costs for business-specific software
- Postage costs
- Phone, mobile and internet bills, with some conditions as detailed here
- For expenses specifically relevant to working at home, see this HMRC guidance on what can be claimed
Larger, more substantial costs like computers and other office equipment are claimable as capital allowances unless the business uses cash basis accounting.
2: Business Premises
Business premise expenses are relevant specifically to the premises used to run your business and can even cover the costs of rent and bills.
Business premises expenses can be claimed for:
- Rent
- Utilities
- Insurance
- Security
- Maintenance
Some of these expenses can be claimed, in part, for those operating their business from home. The proportion of which business contributes to the costs will have to be taken into account. For example, you might be able to claim electricity and heating costs for the room(s) you specifically use for business. If you use simplified expenses then these are claimable as a flat rate.
3: Travel
Travel costs are one of the main business expenses. There’s a significant amount that can be claimed here for those that travel regularly as part of their business, including:
- Insurance
- Fuel
- Repairs and servicing
- Breakdown cover
- Hire charges
- Hotel rooms and meals for business trips
- Business travel by taxi, bus, train or plane
Note that commuting to and from work is not claimable as an expense. Vehicle purchases can be claimed as capital allowances but some vehicles, like a business van, do count also as allowable expenses.
4: Legal and Financial Fees
The cost of hiring professional business services like accountants, surveyors, solicitors or even architects can be claimed as business expenses. Various banking fees like interest, credit card charges and overdraft fees are also claimable. Businesses using cash basis are only able to claim up to £500 in banking charges, fees and interest.
If you’re owed money and probably won’t receive it (bad debt), then this can be included too. Those using cash basis won’t be able to claim for this type of debt, however.
5: Stock and Materials
Allowable expenses include some stock and material costs. This includes raw material costs and the cost of goods for resale purposes. The direct costs of producing goods is also includable.
6: Business Insurance
Allowable expenses include some stock and material costs. This includes raw material costs and the cost of goods for resale purposes. The direct costs of producing goo
Business insurance such as the following can be claimed as an allowable expense:
- Employers’ liability insurance
- Public liability insurance
- Professional indemnity insurance
7: Marketing
Allowable marketing expenses include directory listings, newspaper advertising and mailshots. Both the cost of creating the adverts and distributing them are included. Some website costs are also allowable expenses, including domain registration, hosting and design and web development costs.
8: Clothing
Company uniforms and technical clothing can count as business expenses, so long as it’s used exclusively for business use.
Summary: What Can be Classed as Business Expenses?
Allowable marketing expenses include directory listings, newspaper advertising and mailshots. Both the cost of
The main business expenses likely fall into the category of revenue expenses. These are shorter-term and tend to be expendable or transient in nature.
It’s important to accurately record business expenses, self-employed individuals will have to report them on their self-assessment whereas limited companies will report them on their tax returns.
Always check to ensure your business is recording your business expenses correctly as failure to do so may result in tax underpayments or fines.
