Running a business means dealing with a lot of expenses and figuring out what you can claim for tax deductions can be confusing and stressful.
If you're not careful, you could miss out on valuable deductions or make mistakes that could lead to HMRC penalties.
In this guide, we'll break down the essentials of business expenses, helping you understand what you can claim and how to stay compliant with HMRC rules.
From office supplies and employee salaries to corporate travel costs and marketing efforts, we'll cover everything you need to know to maximise your tax savings in 2024.
Please note: The content provided in this blog is for informational purposes only. For more detailed advice consider consulting a legal professional.
What are Business Expenses?
Business expenses are the everyday costs you incur while running your business. These expenses are vital for keeping your business operational and helping it grow.
They include things like:
Office supplies
Employee salaries
Marketing efforts
Travel costs
In the UK, it’s important to understand how these expenses fit within HMRC rules to stay compliant and save on taxes.
How to Determine if an Expense is Tax-Deductible
Understanding which business expenses are tax-deductible is essential for any UK business owner.
Knowing what you can claim helps you save money and stay compliant with HMRC rules.
Here’s a simple guide to help you determine if an expense is tax-deductible:
1. Is the Expense Wholly & Exclusively for Business?
The first thing HMRC looks at is whether the expense is "wholly and exclusively" for business purposes. This means the cost should be solely for the business and not for personal use.
For example, office supplies and employee wages are typically deductible because they are essential for running your business.
2. Is it a Necessary Business Expense?
Next, consider if the expense is necessary for your business operations.
Necessary expenses are those that you need to keep your business running smoothly.
This includes things like:
Utility bills for your office
Travel costs for business trips
Professional fees for legal or accounting services
3. Can You Provide Proof?
Always keep detailed records and receipts for your expenses.
HMRC requires proof of your claims, so it's important to have documentation showing that the expense was incurred and that it was for business purposes.
Good record-keeping can save you a lot of hassle during tax season.
List of Fully Tax-Deductible Business Expenses
Tax-deductible expenses are costs you can subtract from your business income before calculating the tax you owe to HMRC.
Common examples include:
1. Office Rent & Utilities
Rent for your business premises and utility bills such as electricity, water, and heating are fully deductible.
These expenses are essential for maintaining your business operations.
2. Employee Salaries & Benefits
Salaries, wages, and bonuses for your employees are fully deductible.
Certain employee benefits, such as health insurance, pensions, and childcare vouchers, can also be claimed as business expenses.
HMRC allows deductions for these benefits as long as they are necessary and reasonable.
3. Business Travel
Travel expenses incurred for business purposes, such as transportation, accommodation, and meals during business trips, can be deducted.
If you use your personal car for business travel, you can claim a mileage allowance. HMRC allows 45p per mile for the first 10,000 miles and 25p per mile after that.
Make sure these expenses are directly related to your business activities.
4. Marketing & Advertising
Costs for promoting your business, including online ads, print media, and event sponsorships, are fully deductible.
Effective marketing is crucial for business growth, and HMRC recognises these expenses.
5. Professional Services
Fees paid to accountants, solicitors, consultants, and other professionals who provide services essential to your business are deductible.
These services often help ensure compliance with regulations and improve business efficiency.
6. Office Supplies & Equipment
Expenses for office supplies like paper, pens, and printer ink, as well as office equipment like computers and desks, are fully deductible.
These items are necessary for day-to-day business operations.
7. Uniforms & Protective Clothing
If your business requires employees to wear uniforms or protective clothing, these costs are deductible.
This includes:
Purchasing,
Cleaning,
And maintaining uniforms.
8. Insurance Premiums
Premiums for business insurance policies, such as public liability insurance, professional indemnity insurance, and employer’s liability insurance, are deductible.
These policies protect your business against various risks.
9. Training & Development
Costs for training courses, workshops, and professional development for you and your employees are deductible.
Investing in skills and knowledge is vital for business success.
10. Subscriptions & Memberships
Fees for industry-related subscriptions and memberships in professional bodies are fully deductible.
These memberships often provide valuable resources and networking opportunities.
11. Internet & Phone Bills
Expenses for business internet and phone services are deductible. These utilities are crucial for communication and conducting business activities.
12. Staff Entertainment
While entertaining clients is generally not deductible, HMRC does allow for some staff entertainment expenses.
Events like annual parties or team-building activities can be claimed, provided they are open to all employees and reasonably priced.
13. Home Office Costs for Remote Workers
If you have employees working from home, you can claim a portion of their home office costs.
This might include a percentage of their:
Rent,
Utility bills,
And internet costs.
Always maintain accurate records and receipts to support your expense claims and ensure compliance with HMRC rules.
For more detailed guidance, consider consulting a tax professional.
Non-Deductible Business Expenses You Should Avoid
Non-tax-deductible expenses are costs that can't be deducted from your taxable income.
These typically include:
1. Personal Expenses
Any costs that are personal and not directly related to your business cannot be deducted.
This includes:
Personal travel,
Clothing for everyday use,
And personal meals.
HMRC strictly separates personal and business expenses, so it’s important to keep them distinct.
2. Client Entertainment
Entertaining clients, such as taking them out for meals or events, are generally not deductible.
While it might be beneficial for business relationships, HMRC does not allow deductions for these types of expenses.
According to HMRC’s Business Income Manual:
“With certain exceptions, expenditure on business entertainment or gifts is not allowable as a deduction against profits, even if it is a genuine expense of the trade or business.”
Always document such expenses but be aware that they won’t reduce your tax bill.
3. Fines & Penalties
Any fines or penalties incurred, whether for late payment of taxes, traffic violations, or other legal penalties, are non-deductible.
HMRC considers these personal liabilities, so they cannot be claimed as business expenses.
4. Commuting Costs
The cost of commuting between your home and your regular place of business is not deductible. This includes public transport fares or mileage for driving to work.
Only travel that is directly related to business activities, like visiting clients or attending meetings away from your regular workplace, can be claimed.
5. Non-Business-Related Loans
Interest and fees on loans that are not directly used for business purposes are non-deductible.
If you take out a loan for personal reasons, the associated costs cannot be claimed as business expenses.
6. Political Contributions
Donations or contributions to political parties or campaigns are not deductible.
HMRC rules exclude these expenses from allowable deductions, regardless of the business’s involvement or interest.
7. Capital Expenditures
While everyday operational expenses are often deductible, capital expenditures, such as purchasing new equipment or property, are not immediately deductible.
Instead, these costs are typically claimed over time through capital allowances.
8. Non-Approved Charitable Donations
Only donations to HMRC-approved charities are deductible.
Contributions to individuals or non-approved organisations cannot be claimed as business expenses.
9. Personal Insurance Policies
Premiums for personal insurance policies, such as life insurance or private medical insurance, are non-deductible.
Only business-related insurance, like public liability or professional indemnity insurance, is deductible.
10. Luxury Items
Expenses on luxury items that are not essential for business operations are non-deductible.
For example, extravagant office decor or high-end personal gadgets do not qualify as business expenses.
Always keep thorough records and consult with a tax professional to ensure you’re accurately claiming your business expenses.
Step-by-Step Guide to Recording & Claiming Business Expenses
Step 1: Keep Detailed Records
Keeping accurate records is essential. Save every receipt, invoice, and bank statement related to your business expenses.
Using a business expense tracker app like ExpenseIn can help you digitise and organise these records, making them easy to find and review.
Step 2: Categorise Your Expenses
Organise your expenses into categories such as travel, office supplies, employee wages, and utilities.
This helps you understand and manage your spend and makes it easier to identify deductible expenses.
Step 3: Separate Business & Personal Expenses
Always keep your business and personal expenses separate. Use a dedicated business bank account and credit card for all business transactions.
This simplifies your bookkeeping and helps avoid confusion during tax filing.
Step 4: Understand HMRC Rules on Deductible Expenses
Learn which business expenses are deductible according to HMRC rules.
Refer to previous sections in this article to better understand which expenses are deductible.
Step 5: Use Expense Management Software
Expense management software like ExpenseIn can streamline the entire process of recording and claiming business expenses.
Expense management tools help you track business expenses in real-time, categorise them correctly, and store digital expense receipts.
It also integrates with accounting systems, making tax preparation easier.
Step 6: Track Mileage & Travel Expenses
If you use your personal vehicle for business travel, keep a detailed log of your business mileage.
HMRC allows you to claim a mileage allowance, which can add up over time.
For more information on claiming a mileage allowance, read our article on HMRC mileage rates.
Step 7: Record Home Office Expenses
As previously mentioned, if you work from home, you can claim a portion of your home expenses.
HMRC provides simplified rates for claiming home office expenses, but you need to keep accurate records of your work hours and the portion of your home used for business.
Step 8: Submit Accurate Tax Returns
When it’s time to file your tax return, make sure all your expenses are accurately recorded and categorised.
Double-check your records and ensure you have supporting documentation for every claim.
Step 9: Seek Professional Advice
If you’re unsure about any aspect of recording and claiming business expenses, consider consulting a tax professional.
They can provide valuable advice and ensure you’re complying with HMRC rules.
Step 10: Regularly Review & Update Your Records
Regularly review your expense records to ensure everything is up-to-date and accurate.
This helps you stay on top of your finances and catch any errors early.
ExpenseIn: The Smart Solution for Managing Business Expenses
ExpenseIn is a fantastic tool for managing business expenses, offering a complete solution that makes the process easier for everyone.
It boosts efficiency, accuracy, and compliance, making expense management hassle-free.
Whether it’s submitting expenses on the go, speeding up reimbursements, or providing real-time updates and error reduction, ExpenseIn has you covered.
Key Features:
Mobile app: Submit, approve, and reimburse expenses quickly and easily with ExpenseIn's app. It cuts down on paperwork and speeds up the whole process.
Instant receipt scanning: Snap a photo of your receipt, and ExpenseIn will capture and organise the details for you. This makes keeping track of your expenses simple.
Mileage tracking: Keep track of business travel with Google Maps integration. It's perfect for tracking miles and keeping an eye on travel-related expenses.
Custom approval processes: Set up approval steps that match your company’s needs. This makes sure expenses are reviewed and approved efficiently.
Policy compliance: ExpenseIn automatically checks if expenses follow your company’s rules. This helps you stay compliant with HMRC guidelines.
Detailed reporting: Get insights into your spending patterns. This helps you make smart financial decisions and manage your budget better.
Easy integration: Connect ExpenseIn with your favourite software like QuickBooks, Xero, Sage, and many more. This ensures your financial records are always up-to-date.
Secure data storage: Keep your data safe and comply with HMRC regulations with UK-based data storage.
To learn more and see how ExpenseIn can benefit your business, book a demo today.
