An overview of expenses if you run a small business

Separating “allowable” and “non-allowable” expenses is complex for small business owners. This guide provides an overview of business expenses and links to further resources that provide more in-depth information.

Allowable Expenses

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!

It also depends on your business structure…

Sole trader vs. limited company expenses – there are differences

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).

We’ve included both in this high-level overview, but for an in-depth read, try these guides:

• What expenses can limited companies offset against tax?
• What expenses can you claim if you’re a sole trader?

Capital Allowances

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 purchase business equipment (tools, computers, furniture, machines, etc.), the main capital allowance rate for businesses is 18%. The latest rates are available here.

Most companies can claim an Annual Investment Allowance for expenditure of up to £1m per year. Check the latest government rates and guide here.

If you’re a sole trader (or a partnership) with a turnover of 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 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 reimbursement. 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!

P11D Form

An employer must complete a P11D (Expenses and Benefits) form each year for every employee and director who receives taxable benefits or expenses. The P11D contains details of all expenses and benefits provided during the tax year.

The previous P9D form (used for employees earning less than £8,500) is no longer used, as the earnings threshold was removed in April 2016. All completed P11D forms must be returned to HMRC by 6th July each year.

You generally don’t need to report repayments to a director for genuine business expenses, as long as they’re allowable.

However, employers should ensure that any benefits or expenses that fall outside of HMRC exemptions are correctly reported.

Travel Expenses

Travel costs incurred wholly, exclusively and necessarily on company business can be reimbursed. However, travel from home to work is not allowed.

Travelling 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.”

According to 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.

Overnight Allowances

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 while staying away must be reasonable (e.g., meals, drinks, and 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 during an HMRC inspection.

There are different rules for sole traders and limited company directors.

If you’re a sole trader, you can work out a proportion of your household expenses if this is easy to calculate. Expenses include a proportion of your mortgage interest, rent, utilities and Council Tax.

If you’re a company director, you can only claim for incremental costs, not fixed costs like mortgage interest. So, the scope for claiming household expenses is limited.

A second option – often used by limited company owners – is to claim a fixed HMRC £6/week fixed rate expense to cover the extra costs of working from home.

Read more in our dedicated guide to claiming homeworking expenses.

Business Expenses & VAT

The rules for claiming business expenses are complex; however, they become more so when 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 VAT calculations, expenses are viewed as being “non-business”, “taxable” and “exempt”.

If you are registered for VAT, you can only reclaim VAT on purchases made purely for business reasons.

You can read more in our VAT guide as a starting point.

Keeping Records

The rules relating to claiming business expenses are strict.

As a small business owner, you will collect a large number of expense-related receipts and documents over the course of each tax year. Make sure you keep them safe – and consider using online accounting software to make your life a lot easier.

You should only claim for business-related expenses, and there are different rules depending on whether you’re a sole trader or company director.

Thanks to Ian Marlow at HfM Accountants for his contributions to this guide.