Further comments on business expenses

Costs of goods bought for resale or goods used (boxes 17 and 32)

Generally allowed expenses

At the end of your accounting period you will normally have a stock-take if you are a manufacturer or a retailer of goods.

If you use the accruals basis when preparing your accounts, your stock must be valued at the lower of its cost to you or the amount you would get if you sold it. You will need to include any work in progress and raw materials you have received but not yet paid for.

To work out your cost of sales

• Take your stock value and that of any work in progress at the start of the accounting period; and
• add: any raw materials or purchased stock you have bought during the period; and
• deduct: what remains at the end of the accounting period.

If you are using the cash basis of accounting then you do not need to calculate your closing stock position.

Some other points to note:

• If your business provides services rather than goods, you would make an adjustment, similar to the one shown above regarding stock, to your work in progress to reflect any increase or decrease during the period
• If you are a manufacturer of goods you can deduct the costs of producing the goods you sell such as direct labour costs, machine hire, depreciation of fixed plant (but see generally disallowed expenses below), small tools, etc
• If you provide services you may have rechargeable expenses you can deduct from your profit

Wages, salaries and other staff costs (boxes 19 and 34)

There is more information about being an employer in our guide on ‘taking on an employee’.

Generally allowed expenses

• Wages and salaries including bonuses, commissions and overtime paid to your employees whether permanent, temporary or just casual labour
• Employer's National Insurance contributions (NIC)
• Pension contributions (including auto-enrolment deductions)
• Wages costs (including NIC) of employing your wife or husband or another member of your family provided that they do genuinely work for the business and their pay (which must be at least the National Minimum Wage) is reasonable for the amount of work they do. You should be able to show that the wages were actually paid, for example by showing entries through the business bank account
• Staff entertaining costs – for example the staff Christmas party
• Other staff-related costs such as canteen expenses and recruitment agency fees
• Costs of subcontract labour or a substitute/locum to stand in and do the work for you if necessary
• Employee training costs and any fringe benefits

Generally disallowed expenses

• Your own drawings from the business (remember that if you pay yourself a ‘salary/wages’ from your business this is still drawings as you cannot be an employee of your own self-employed unincorporated business)
• Employees' wages remaining unpaid nine months after your accounting date – these will be allowed once they are actually paid

Car, van and travel expenses (boxes 20 and 35)

Generally allowed expenses

• Business element only of the motor expenses incurred in running a vehicle used in your business including insurance, servicing, repairs, road tax, fuel, hire and leasing charges, parking charges (but not parking fines), membership of a vehicle breakdown service such as the AA or RAC or similar. Instead of claiming the relevant business part of the vehicle running costs, you may instead claim a flat rate mileage allowance

• Direct costs associated with a wholly business journey such as parking costs, toll charges, congestion charge, ULEZ charge and other clean air zone charges
  Example: Jelena is a self-employed mobile hairdresser. She visits a client in London and has to pay £2.50 to park her car for an hour, and also £15 congestion charge for driving into London. As Jelena’s car is quite old and doesn’t meet the Ultra Low Emissions levels, Jelena also has to pay a £12.50 ULEZ charge. As all the charges relate to a wholly business journey, the total costs of £30 are allowable in full.

• Hotel accommodation, air, rail or taxi fares, meals connected to your overnight stay whether included in your hotel charge or separate, additional subsistence expenses such as expenditure on meals where your work involves substantial travelling or where you need to make one-off journeys that are not part of your normal business activities
• The cost of vehicles other than cars if you are using the cash basis

Generally disallowed expenses

The following are generally disallowed:

• Any non-business motor expenses
• Travel between your home and business
• Cost of buying vehicles for your business (if you are using the accruals basis but you can claim capital allowances instead)
• Cost of buying cars if you are using the cash basis, (you can claim capital allowances instead)
• Parking fines and other fines
• Costs of most meals apart from those mentioned above

Phone, fax, stationery and other office costs (boxes 23 and 38)

Generally allowed expenses

• Typical office expenses such as telephone, broadband, fax, postage, stationery and printing, costs of trade or professional journals and subscriptions, courier services, general office expenses, costs of insurance not included elsewhere, together with any other similar recurring costs which arise in running the business
• Cost of computer software you use in your business which you obtain under a regular licence fee and in addition any computer software with a limited lifetime of generally less than two years. (Any other software is usually capital expenditure on which you can claim capital allowances if you are using the accruals basis.)
• The cost of office equipment and computer software if you are using the cash basis

Generally disallowed expenses

• Any non-business part of your general expenses
• Any personal expenses
• Payments to political parties
• Most donations and fees made to clubs, charities or churches

Advertising and business entertainment costs (boxes 24 and 39)

Generally allowed expenses

• Everyday costs of advertising and promoting your business goods or services – for example newspaper advertising, mail-shots, free samples and gifts up to £50 per year to a customer, however the gift must prominently advertise or promote your business or services and excludes food, drink or tobacco
• Staff entertaining unless this arises as part of business hospitality – if a member of staff takes a customer to lunch this is business entertaining and is disallowable. There is more information on GOV.UK

Generally disallowed expenses

• Entertaining and hospitality apart from the costs of entertaining staff
• Gifts of more than £50 per year to customers (see above -generally allowable expenses) as well as all such gifts where there is not a prominent advert for your business or the gift is food, drink, tobacco or a voucher

Interest on bank and other loans (boxes 25 and 40)

Generally allowed expenses

• Interest on a business overdraft or business loan from a bank or other lender including any arrangement fees involved. If you elect to use the cash basis of accounting you can only claim up to £500 in total of interest and finance charges (there are exceptions to this, as the payment of interest on business purchases is allowable under the cash basis and not included in the £500 limit, for example, interest on trade purchases and interest on hire purchase for plant and machinery would be allowable even if the costs total above £500).

Generally disallowed expenses

• Any part of the repayment of the business loan or overdraft which is a repayment of the capital part of the loan.

Irrecoverable debts written off (boxes 27 and 42)

This will be relevant if you have experienced an increase in customers not paying you or are concerned that they will be unable to pay what they owe you in the future – these are called bad debts. How these are treated for tax will depend on whether you prepare your accounts for your tax return using the cash basis or the accruals basis.

• Cash basis: as you only account for sales income when you receive payment then you will automatically be receiving tax relief and will not need to make any adjustments to your tax return for any bad debts.
• Accruals basis: as you will have accounted for the income when the sales transaction occurred you will need to make an adjustment in your accounts for any bad debts. This means you will have an expense for the bad debt which will reduce your profit for the income you will no longer receive, this is illustrated below:
  
  Olivia supplies cafés with baking products and is owed £500 from one business which completely stops trading and cannot afford to pay any of the money they owe her. As Olivia prepares her accounts using the accruals basis, she would have included £500 in her total sales income and so as part of her accounts she will have an additional expense of £500 as a bad debt.

You can only receive tax relief on specific bad debts, such as a particular customer who has ceased trading or informed you they cannot pay your invoice. You can claim bad debt relief in this way whenever it becomes clear that you will not be paid. This could be in the same accounting period as the invoice was raised or it could be in a later accounting period.

If you claim bad debt relief for a particular invoice as you do not expect to be paid, but then you do receive payment from the client or customer sometime later, the invoice will need to be brought back into your accounts as income in the accounting period in which you receive the payment. If you only receive partial payment of the amount owed, then only a sum equal to the payment received will need to be brought into your accounts as income.

There is no tax relief for a general bad debt expense, for example you estimate that a quarter of your customers who owe you money (your debtors) will be unable to pay – you cannot include a bad debt expense on your tax return for 25% of your debtors.

As explained above this will apply when using the accruals basis of accounting only.

Accountancy, legal and other professional fees (boxes 28 and 43)

Generally allowed expenses

• Fees charged by accountants, solicitors, surveyors, architects, stock takers and other similar costs (but see below).
• Debt recovery costs

Generally disallowed expenses

• The legal expenses involved in buying premises or equipment as these are treated as part of their cost. If using the accruals basis and capital allowances can be claimed on the expenditure these legal costs are included in the total spend on the asset involved. If using the cash basis and can treat the expense of the equipment as a ‘cash’ expense then can also treat the legal expense as a ‘cash’ expense.
• Costs and fines for breaking the law or any other illegal acts
• Legal expenses on the formation of a company

Other business expenses (boxes 30 and 45)

Generally allowed expenses

• Any expenses which you cannot include in boxes 17 – 29. This might include:
  • Contributions to business link organisations, local enterprise agencies, training (including local) and enterprise councils, and similar
  • Pre-trading expenditure – allowable revenue expenses that are treated as if incurred on the date you start trading
  • Training expenses - however where attendance at a training course is intended to give you new expertise, knowledge or skills then the expenditure is a capital cost, so is not allowable as a deduction from profits (particularly where it brings into existence a recognised qualification). On the other hand, where attendance is merely to update expertise and knowledge. which you already possess, the expenditure is normally regarded as revenue expenditure and will be deductible if it is a training expense 
  • Flat rate scheme VAT payments – if you are a VAT registered business using the Flat Rate Scheme for VAT purposes

Generally disallowed expenses

• Non-business element of any expenses in box 30
• Cost of any ordinary clothes you buy even if you only use them for work

Where can I find out more information?

Our guide to self-employment is intended to supplement the material in this section. We wrote this guide to help advisers (non-tax) who advise low-income self-employed individuals and also for self-employed people who want more detailed information in one accessible place. The guide explains the less common tax rules and contains more detailed information including a case study showing how to prepare accounts and what to include on your 2022/23 tax return.

HMRC helpsheet HS222 How to calculate your taxable profits contains a useful table of the most common allowable and disallowable expenses.

Also there is information on our website on taking on an employee.