Are There Any Restrictions on Claiming Business Expenses?

One of the areas that cause the most concern for business owners is what expenses they are allowed to put through the business.

In fairness, the rules aren’t always totally clear, so to help people see the wood for the trees we thought it would be a good idea to look at some of the more common issues and provide a few answers.

Now there is an important point to make, and it’s that no two taxpayers’ situations are alike. If you are uncertain, then make sure you take advice rather than guess as the latter could end up being costly!

So, let’s dive and look at a few of the more commonly asked questions:

What are expenses?

The “wholly and exclusively” rule

Do I need to keep receipts for my expenses?

Can I claim for food?

Can I claim VAT on my expenses?

Can I use an app to record my expenses?

How do I claim fuel and motoring costs?

Can I claim expenses from a previous tax year?

What happens if I’m paying something off in monthly instalments?

Can I claim for using my home?

Can I claim for expenses incurred before starting my business?

I need training – is this a business expense?

Is a business gift an allowable expense?

This may seem like an obvious question but there is often some confusion around what expenses actually are, and for good reason.

If we are talking in purely accounting terms the things you spend money on to sell are known as “Cost of Sales”, and this might be things like stock for a shop, or copper pipe for a plumber.

But expenses are things that you buy for use in your business that aren’t directly related to sales, and that will get used up in a year. Examples here would be fuel for a van, insurance, or telephone costs.

But often you’ll see expenses classed as anything that you spend money on for your business. Often by companies that should know better!

Also, we need to make a distinction here. Employees can claim “expenses” from their employer, or a self-employed person can spend money on behalf of their business that can constitute “expenses”. Not confusing at all!

For the purpose of this article, we’re looking at smaller businesses, typically owner-managed whether that be a limited company, partnership, or sole trader, and we’re looking at costs that the business may incur.

The first rule to remember about expenses is that to claim back the whole cost, the expense must have been incurred wholly and exclusively on behalf of the business.

For example, buying photocopier paper that is used in your office for purely business purposes is perfectly OK, but paying for your Netflix subscription for home certainly isn’t, because there is a personal element.

In some instances, it is possible to claim some of the expense against tax where you can reliably show what proportion of the expense was for business purposes (See home office costs).

And if you buy mixed supplies, in other words, you buy some things for home and some for the business at the same place, then it is always helpful to either pay separately or at the very least get an itemised receipt.

One of the good things that has changed over the last few years is that HMRC no longer expects businesses to keep physical copies of receipts. We always advise that you still keep proof where possible, whether they’re electronic or paper copies!

As long as you can prove that you spent the money, and if you’re recording VAT that you have evidence of the trader’s VAT status, then you are good to go.

A good example here is the receipt upload feature on Pandle which allows you to take a photo of the document and assign it to a transaction without needing to keep the original bit of paper.

 
Receipt Uploads document capture for accounting

This is one of the areas that could have a blog post all of its own! In general terms, you can’t claim for food. This is a personal expense and after all, you’d be eating anyway even if you weren’t at work. But there are some exceptions.

If you travel occasionally to somewhere away from your home, then HMRC deems it allowable to claim back the cost of reasonable living costs. Note the word “reasonable” here. You can’t have a slap-up meal at The Ritz!

But if you are working on-site, away from your main place of work for more than four hours, then you can claim back the cost of some meals.

For example, if you are an IT professional who normally works in your own office but occasionally travel a long distance to install hardware, then it would be acceptable to claim for food.

HMRC helpfully produce so-called ‘benchmark’ rates to give us a guide. These are generally for employees, but also give a good guide if you are self-employed.

  • If you leave the house earlier than 6 am and this is earlier than your usual time, then the breakfast rate of £5 is allowable.
  • For trips of more than five hours away from your main place of work, you can claim the one-meal rate of £5.
  • You can claim the standard £10 rate if you are away from your main place of work for more than ten hours.
  • An irregular late finish, working later than your usual hours, means you can claim up to £15.

 

There are some important points to note here though.

 

The rules are different if you are self-employed or if you work through a limited company, and HMRC also has somewhat complex methods for determining whether the place you are working is not your normal place of work.

And again, expenses do need to abide by the wholly and exclusively rule. So just because you are on a trip away from your main place of work, it doesn’t mean you can claim your food back if you were visiting your aunt in Aberdeen.

Make sure you get advice before claiming back food and subsistence expenses as this is a really complex area.

Yes, in general you can. One of the particularly annoying parts of the UK tax system is that VAT, corporation tax and personal taxation rules are often different, so you do need to check. But, in general, if your expenses are allowable for tax then they should be allowable for VAT purposes.

But please do check both tax and VAT rules!

Yes, you can. HMRC are much more flexible nowadays regarding how people go about maintaining their records, and apps are a perfectly acceptable alternative to a filing cabinet full of paper. In fact, Making Tax Digital positively encourages digital record keeping!

 
MTD VAT Software

Again, this is a very complex area and varies depending upon whether you are self-employed business or a limited company, and whether it is your own car, or it’s owned by the business.

Once again, the ‘wholly and exclusively’ rule applies, so you can only claim motoring expenses where they are for business purposes.

You can choose to claim an advisory mileage rate that HMRC set based on the type of vehicle you are using, and the number of miles you do in a year. Or you can claim back fuel and make a deduction for any personal use of the vehicle. We have a blog which goes into fuel and vehicle expenses in a bit more detail, but if in doubt – get advice!

This happens all the time. You incur an expense, and the bill turns up after the year-end. Well, the good news is that in general, yes you can claim for expenses after year-end for up to four years. As long as you are following all the rules for expenses, then you can retrospectively claim it against tax.

This is always a tricky one, and very much depends upon whether you are using cash or accrual accounting. It also depends upon the type of expense and how you are paying.

So, if you are self-employed, using cash accounting then you would simply claim the amount you pay when you pay it.

If you are using accrual accounting, then it gets a little trickier because the expense is claimed in full when you contract for the item and not when you actually pay.

As we noted before, expenses can get very confusing, so it is always best to take qualified advice based on your personal situation.

Yes, you can, though there is a “but”. People who use their home for business purposes can claim a flat rate allowance. This is different for sole traders and directors – directors/employees have a flat rate of £312 per annum. For sole traders this is based on the number of hours worked at home.

Alternatively, you can claim back the cost of rates, heat, and light, and so on, if you can show that you have a specific area that is set aside for purely business purposes. But, if you do this, you may incur capital gains tax on the business part of your home when you come to sell.

Yes, you can. This very much depends on the type of costs you incur.

You can claim capital allowances for assets which will be with you for longer than a year. This might include big-ticket items such as equipment or machinery. Normal running expenses can be claimed against your tax and VAT bills in the usual way.

Your expenses might also relate to services, rather than products. A good example is if you take legal advice or incur accountancy costs before starting up, or if you spend money developing a website. As long as they relate entirely to the business, you can claim expenses from up to seven years before you start trading.

 

What about claiming VAT before my VAT-registration?

 

Yes, you can claim back VAT on purchases you made before becoming VAT registered. The expiry date is four years for goods (but only if the business still owns them), and six months for services.

 
Pandle Mobile App

This is a tricky one and isn’t necessarily intuitive. If you need training in a new skill, then as a business owner you can’t claim back the cost against your tax.

But if you need refresher training or you need to extend already existing skills then you can claim it back! Business training is deductible for employees.

This is another area of tax law that could fill a book.

If you give small gifts of under £50 in value to your employees, then you can claim these back as what HMRC calls a “trivial benefit”. Over this, and it moves into the realm of Benefits in Kind, with both you and the employee paying tax and National Insurance on the value of it, as if it were added to their wages.

Gifts to clients are tax-deductible as long as they are branded and less than £50, but other gifts are classed as entertainment and aren’t.

And if you give a gift to a registered charity then the whole amount is deductible against tax. Phew!

Keep on top of your expenses with Pandle

The whole area of business expenses is a minefield of different rules and regulations, but the good news is that if you make an honest mistake and can show your workings, then generally speaking HMRC won’t levy a penalty.

The important point is that you keep good records, and are able to show these should you be unlucky enough to get an inspection. Expenses are one of those areas that nobody likes but that has to be done, so it makes sense to make it easy on yourself. Pandle is designed specifically to help businesses cope with bookkeeping and accountancy, and makes recording expenses a doddle.

Create a free account now and see how easy it is, or contact us for help.


Elizabeth Hughes

A content writer specialising in business, finance, software, and beyond. I'm a wordsmith with a penchant for puns and making complex subjects accessible.


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