What’s an allowable expense, what’s not, and how to record information accurately
The rules and categories surrounding allowable and disallowable business expenses for tax purposes have not changed under Making Tax Digital (MTD). However, if you’re just starting to navigate recording your expenses and outgoings to create your MTD returns, you’ll have to get to grips with the tricky and sometimes contradictory rules around classifying your business expenses.
It really does come down to fine details; for example, a cup of coffee is treated differently for tax purposes according to where it was bought, and under what circumstances.
The general rule of thumb is to consider whether or not you’d have bought that cup of coffee if you weren’t working in your business or working away from home.
Ask yourself:
“Would I have spent money on this item if I weren’t running a business?”
If the answer is no, then the expense is often allowable.
If the answer is yes, then the expense is likely to be disallowable.
If the answer is no and yes, such as home broadband that’s used for both personal and business home office purposes, you will likely be able to claim the business portion of the cost.
Sole traders and MTD
Under MTD, sole traders must keep digital records of income and expenses to create quarterly updates through MTD-compatible software.
Your information needs to be recorded as individual items with accurate dates of transaction and in the appropriate expense category, including:
- Administration (office and business)
- Business entertainment
- Business premises
- Capital allowances
- Finance
- Maintenance
- Marketing and sales
- Professional services
- Staffing
- Stock and materials
- Travel and vehicle
- Training
- Working from home
There are nuances within these categories; most things are logical and obvious when you think about it, but others are less clear-cut. For example, you can claim some of the costs of decorating a room in your home to use as an office or consulting room, but you can’t claim the costs of creating a separate business entrance.
The following information should guide you through the main categories and exceptions. Identify the category your cost or expense comes under, and whether it will qualify for tax relief, together with any special circumstances:
| Category | Allowable | Notes | Disallowable | Notes |
| Administration | Printing | |||
| Stationery | ||||
| Postage | ||||
| Internet | ||||
| Phones | ||||
| Software | Includes subs for accountancy packages | |||
| Printer ink | ||||
| Small equipment & tools | ||||
| Advertising & Marketing | Advertising | |||
| Website | ||||
| Sponsorship | ||||
| Branded clothing | ||||
| Business entertainment | Annual staff/works do | Event hospitality, Entertaining clients, customers & suppliers | Not taxable | |
| Sports tickets | Not taxable | |||
| Branded Xmas gifts | Max £50 gift | Client gifts | Not taxable | |
| Business premises | Business rent | |||
| Mortgage interest | ||||
| Water and council tax | ||||
| Energy | ||||
| Property insurance | ||||
| Security | ||||
| Use of home office | HMRC flat-rate. Max £312 annual claim | |||
| Decoration of home office | ||||
| Capital allowances | Equipment | |||
| Vehicle purchase | ||||
| Finance | Bank interest | |||
| Bank charges | Transfers to business savings account | |||
| Business credit card charges | ||||
| HP interest | ||||
| Loan interest | Loan repayments | |||
| Sales charges | ||||
| Maintenance | Repairs & ongoing maintenance | |||
| Protective/safety clothing & footwear | Non-protective clothing | Private | ||
| Uniforms | Branded with logo | Unbranded work clothes, including suits and smart clothing | Private. Hair & beauty | |
| Private | Drawings | Private | ||
| Gym membership | Private | |||
| Childcare | Private | |||
| Glasses & contact lenses | Private | |||
| Charity donations | Private | |||
| Home renovations | Private | |||
| Professional services | Legal fees | Personal legal costs | Private | |
| Legal fees: buildings & machinery | Private | |||
| Fines for breaking the law | Private | |||
| Accountancy/ bookkeeping fees | ||||
| Consultants or advisors | ||||
| Staff | Net wages | |||
| PAYE | ||||
| Total pension | ||||
| Attachment orders | ||||
| Employers NI | ||||
| Agency fees | ||||
| Trivial benefits | Below £50: employees only | |||
| CIS subcontractors | Non-CIS | |||
| Stock & materials | Cost of stock & goods for resale | |||
| Travel & vehicle | Simplified mileage | Using HMRC-approved mileage rates | Travel to/from place of work | Private |
| Fuel | If claiming actual vehicle costs instead of simple mileage | Travel to/from place of work | Private | |
| Tolls, congestion charges | ||||
| Bus, train, taxi fares | ||||
| Car & van insurance | ||||
| Vehicle repairs & servicing | ||||
| Vehicle licensing | ||||
| Breakdown cover | ||||
| Parking | Parking & speeding fines | Private | ||
| Work away travel | ||||
| Work away hotels | ||||
| Work away food | Non-work away food | Private. Lunch at regular workplace | ||
| Training | Staff training courses | CPD or update existing job skills | New business skills Personal/non-business | Training for entirely new trade/profession |
| Professional subscriptions | Must be HMRC recognised | Personal subscriptions | Private |
(Information correct at time of publication)
Further information and guidance are available on the HMRC website:
https://www.gov.uk/expenses-if-youre-self-employed
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