What Counts as a Business Expense?

If you are self-employed, working as a freelancer or running a limited company, it is essential to know what counts as a business expense. Being able to identify and claim business expenses accurately can work to reduce your taxable income substantially, enabling you to pay less tax. However, you first need to know what the HM Revenue and Customs (HMRC) classifies as a legitimate business expense. 

What is a Business Expense?

A business expense is defined as any cost which is incurred totally and exclusively for business purposes. In order to be classified as a deductible expense, the expense must be directly related to running, maintaining or expanding your business.

Expenses that have a dual purpose (that is both for business and personal) cannot usually be claimed in full and, in some cases, may not be claimable at all.

These allowable expenses can be deducted so that you pay less tax on your taxable profit.

It is also worth remembering that if you are using your £1,000 tax-free ‘trading allowance’ you  cannot claim expenses.

What are Common Business Expenses?

In the UK, these are the most common types of costs that can be claimed as business expenses.

Office Costs

Anything relating to running or maintaining an office can be classified as a business expense including: 

• Rent: if you rent office space, the cost of rent is fully deductible.
• Utility bills: any utilities for your business premises, including electricity, gas, water, and heating, are deductible.
• Office supplies: things such as stationery, printer ink and office furniture are deductible expenses.

Travel Expenses

If travel is a core part of your business, there are various travel expenses that are deductible including:

• Public Transport: Costs for train, bus, taxi, or even air travel, as long as it is for business purposes, can be claimed.
• Mileage: If you use your personal vehicle for business travel, HMRC allows you to claim mileage up to a certain point: 45p per mile for the first 10,000 miles of car travel and 25p per mile after that.
• Accommodation: Hotel stays for business trips are a deductible expense but these will need to be strictly necessary and reasonable.
• Meals: If you are travelling for business, you can claim meal expenses if the trip is outside your normal working pattern.

Staff Costs

Employing a staff is a deductible expense including:

• Salaries and Wages: Paying employees, including bonuses and commissions.
• Pension Contributions: Employer contributions to employee pension schemes are considered deductible expenses.
• National Insurance: Employer National Insurance Contributions (NICs) are also deductible as business expenses.

Professional Services

The fees for professional services are deductible expenses such as: 

• Accountancy Fees: Paying to hire an accountant to manage your business finances or file tax returns is a deductible expense.
• Legal Fees: Any legal fees related to the business, including writing contracts or legal disputes, can be claimed as an expense.
• Consultancy Fees: If you pay business consultants to provide advice on improving or expanding your business, their fees are also deductible.

Marketing and Advertising

Anything to do with marketing your business is deductible such as:

• Advertising: Costs for TV, online, or print advertising associated with your business are allowable expenses.
• Website: Setting up and running a business website, including domain fees and hosting, are deductible expenses.
• Promotional materials: Paying for business cards, pamphlets, flyers or branded merchandise is all deductible.

Equipment and Technology

Setting up your business with the right equipment and technology is an allowable expense. This includes: 

• Office Equipment and tools: Any equipment for your office such as computers and printers are deductible expenses. For businesses that require specific tools or machinery, these costs are also deductible.
• Software: Any software purchases or subscriptions that are used for business purposes can be claimed as expenses.

Professional Development

Training courses relating to your business, such as courses to learn a specific skill or refresher courses, can be claimed as business expenses.

What Can be Claimed as a Business Expense if you Work from Home?

If you run your business from home, there are certain household expenses that can be claimed as business expenses. This includes:

• Utility bills: If you work from home, you can claim a percentage of your electricity, heating and water bills
• Broadband and phone bills: If you use your broadband and phone for business purposes, you can claim a portion of these bills.
• Mortgage interest or rent: Depending on the amount of space you use for business, you may be able to claim a proportion of your mortgage interest or rent.

Can You Claim Business Entertainment and Gifts as Business Expenses?

If you are entertaining clients, such as inviting them to meals or events, you should note that these costs are generally not deductible. When it comes to fits, you can claim up to £50 per gift or clients or employees. However, within this you cannot provide any gifts that are food, drink, tobacco, vouchers, and should include a clear advertisement of your business.

What Costs Can You Claim as Capital Allowance?

If you are buying something you keep to use in your business, such as machinery, vehicles, or business premises, you may need to claim these costs through capital allowances instead of as regular business expenses. This lets you deduct the cost of these assets over several years.