How do I claim business expenses?

Business expenses are costs incurred in running your business. Many of these costs can be deducted when calculating your taxable profits, which can reduce the amount of tax your business pays.

Common business expenses can include:

• premises costs – such as rent, business rates, utilities and property insurance
• office costs – such as stationery, postage, software and telephone costs
• staff costs – including wages, employer National Insurance contributions and certain staff training costs
• travel costs – such as business journeys, parking and accommodation when travelling for business
• stock and materials – goods bought for resale and materials used to produce goods
• marketing costs – such as advertising, website costs and other promotional activity
• professional and financial costs – such as accountancy fees, business insurance and some legal and banking costs.

Not every cost associated with running a business is allowable for tax purposes. Generally, there must be a business purpose for the expense, and personal expenditure can’t be claimed.

The detailed rules differ depending on whether you operate your business as a sole trader, partnership or limited company.

For sole traders and ordinary partnerships, expenses are generally allowable if they’re incurred wholly and exclusively for the purposes of the business.

If an expense has both business and private use and the two can be separated, you can normally claim the business proportion. For example, if you use a mobile phone for both business and personal calls, you may be able to claim the proportion of the costs relating to business use.

The way some expenditure is treated also depends on whether you prepare your accounts on a cash or traditional accounting basis. For example, under cash basis, the cost of many items of equipment can be claimed as an expense, whereas businesses using traditional accounting may instead need to claim capital allowances.

If you’re a sole trader or a partner, you may be able to use simplified expenses for certain costs. These use HMRC flat rates instead of requiring you to calculate the actual business proportion of the expense. Simplified expenses can be used for certain vehicle costs, working from home and living at your business premises. You don’t have to use them, so you can compare the simplified amount with your actual costs and use the method that is most appropriate for your business.

Sole traders and partners don’t claim reimbursement from their business in the same way as employees or company directors because there is no separate legal entity employing them.

Not every cost connected with your business can be deducted when calculating taxable profits. Personal expenses and the private element of mixed-use expenses aren’t normally allowable, and specific tax rules restrict some types of expenditure.

Common examples of costs that may not be allowable include:

• personal or private expenses
• everyday clothing, even if you wear it for work
• fines and penalties for breaking the law
• some legal and professional costs
• entertaining clients or customers
• the private element of costs that have both business and personal use.

Different rules apply to some expenses depending on whether you’re self-employed or operate through a limited company:

For sole traders and partnerships, expenses generally need to be incurred wholly and exclusively for the purposes of the business.

For limited companies, expenses are generally deductible for Corporation Tax if they’re incurred wholly and exclusively for the purposes of the company’s trade. Separate rules can apply when a company pays or reimburses expenses for directors and employees.

How you claim expenses depends on how your business is structured.

If you’re self-employed, allowable business expenses are taken into account when calculating your taxable business profit. You’ll report the relevant figures through Self Assessment. You don’t normally send receipts with your tax return, but you must keep appropriate records to support the amounts you claim.

If you operate through a limited company, qualifying expenses paid directly by the company are recorded as business costs. If a director or employee pays a qualifying business expense personally, the company can normally reimburse them, subject to the relevant rules. The company should keep records to support the expense and reimbursement.

If your business is VAT registered, you may also be able to reclaim VAT paid on eligible business expenses, provided the VAT rules are met and you have the appropriate evidence.

Keep accurate records of your business expenses so that you can support the amounts included in your accounts and tax returns.

Depending on the expense, records might include:

• invoices and receipts
• bank and credit card records
• mileage or business travel records
• expense claims and evidence of reimbursements
• petty cash records
• calculations showing how you’ve divided an expense between business and private use.

If you’re VAT registered, you’ll also need to keep the records required to support any VAT you reclaim.

You don’t normally need to send these records to HMRC with your tax return, but you must keep them for the required period and be able to provide them if HMRC asks.