Understanding 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.

Before we continue though, it’s important to know no two business owners are the same. If you’re not sure, then make sure you take advice rather than guess as the latter could lead to expensive mistakes. And nobody likes those!

What are expenses?

This may seem like an obvious question but there is often some confusion around what expenses actually are, and for good reason. We know it’s annoying when no one can give you a definitive answer of what is and isn’t an expense, but that’s because the answer is literally anything ‘wholly and exclusively used for your business’.

You’re probably thinking “surely they don’t mean everything”, but we really do. If you needed to, for whatever reason, hire a bunny costume, you’d be able claim that as a genuine expense – as long as it directly contributes to the running or operation of your business.

We’ve said it before, but it would need to be used for business purposes. For example, for a video to go on your business page, rather than to try and win an Easter bunny competition at your kid’s school.

You do need to be able to prove any expenses you claim are for business purposes only. Which is why we’re very keen about recording business expenses in your accounts.

Can I claim food as a business expense?

Food is usually classed as a personal expense because you’d be eating anyway regardless of whether you were at work or home, but there are instances where it is acceptable to claim.

If you occasionally travel to somewhere away from your regular place of work, then HMRC deem it acceptable to claim reasonable costs for associated meals. Note the word “reasonable” here. You can’t have a slap-up meal at The Ritz! Although that would be amazing, and please can we come?

An example of this would be if you were an IT professional. You normally work in your own office, but occasionally travel to install hardware. Whilst on the road, it would also be acceptable to claim for food.

There are some grey areas here, so be sure to reach out to your accountant for assistance. 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.

How do I work out mileage expenses?

As a business owner you can claim back the cost of journeys you make for business. The way you do this depends on multiple factors, such as whether you’re a sole trader or a limited company, and whether your car is owned by yourself or your business.

We have a blog which goes into fuel and vehicle expenses in a bit more detail, but if in doubt – get advice!

Just remember that any mileage you do claim for will need to be ‘wholly and exclusively’ related to your business. That means no sneaky trips to France and claiming it as a business expense. We know what you’re thinking!

While you most likely have the best intentions to be truthful over how much mileage you use for business versus how much relates to your own personal usage, it can be tricky to keep on top of which is which. Using a mileage tracker will help you keep track of all your business miles. Just casually mentioning it.

It’s not only fuel that comes under allowable expenses either. Other costs that tend to come with work-related travel may well also be claimable. So, this would be things like:

I need training – is this a business expense?

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 unless it’s to develop expertise in new technology in your industry. You can also claim for refresher training or if you need to extend already existing skills. Business training is deductible for employees.

What else can I claim tax relief on as an allowable business expense?

It’s a very common question! We go over some of the most common answers below.

Is a business gift an allowable expense?

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!

Business insurance

Any business insurance you need to take out as part of running your company can be claimed as an allowance expense. This includes contents insurance, employers’ liability insurance, public liability insurance, and professional indemnity insurance.

Your salary as a director

Limited company directors often pay themselves a mixture of salary and dividends so they can be more tax efficient. You can offset the salary part against your Corporation Tax bill, too!

Pension payments

If you run a limited company then the business will make pension contributions as an employer, and can claim tax relief against these just like it does with wages. There’s no limit on what you can pay into a pension, but you can only claim tax relief on your contributions on either £60,000 or 100% of your salary in a year – whichever is lower.

Using your home (or part of it) as an office

More of us are working from home than ever, and it can be a cheaper alternative to paying for additional office or workshop space. If this is the case, then you can usually claim a percentage of your household utility bills and running costs as an allowable business expense.

You’ll need to show that you’re only claiming for the part of the cost which relates to your business though, so double check HMRC’s guidance for working this out, or ask your accountant!

Phone and broadband costs

Broadband and phone lines that are set up exclusively for business use can also be claimed as a business expense when running a limited company. Mobile contracts in particular must be in the company’s name to claim the whole thing. Otherwise, personal contracts need to be apportioned so only calls or data used for work purposes are included as a business expense.

Professional subscription expenses

Again, this would be anything like magazine subscriptions or membership of professional bodies that directly relate to your role within the business.

Health checks, including eye tests

If any of your employees use computer screens regularly in their job, eye tests and general health checks can also be a claimable expense. Any further costs like contact lenses or glasses can only be claimed if they are strictly used as part of their employment and for screen-based working.

Bank charges

Any bank charges, for example account fees, loans, or credit card interest, can also be claimed as an allowable business expense.

Annual staff party expenses

Regularly hold Christmas parties or summer soirees for your staff? The good news is if it’s an annual event that all staff members can join in with, you should be able to claim it as an allowable business expense. It must cost no more than £150 per person though.

Am I allowed to claim expenses from a previous year?

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.

Can I claim for any pre-trade expenses?

Yes, you can. Pre trading expenses are purchases you made for the business before you started trading. Anything you would be allowed to claim now the business is up and running is likely to be ok to backdate, as long as it’s ‘wholly and exclusively’ used for your business.

We know you’re probably already sick of us saying that, but it’s one of the key principles of claiming business expenses.

Is there an easier way to work out my business expenses?

HMRC understand working out your actual business expenses can be stressful – so they introduced flat rates (or simplified) expenses instead. Like the name suggests, rather than working out your actual expenses, you can use HMRC’s flat rate to calculate your claim instead.

Simplified expenses can be used by sole traders to claim expenses, and by business partnerships which don’t have companies as partners. Flat rates can be used for:

For some businesses it can be a much easier way to work out your expenses, but it isn’t for everyone!

Learn more about using Pandle to make business accounting easier. Create an account today and decide what to do with all the extra time you get back.