What business expenses are allowable?
You may wish to claim business expenses. In this section, we discuss which business expenses are allowable. When we say business expenses are ‘allowable’ this means that the tax rules allow the particular expense to be deducted from trading income when calculating the business’ profits on which it will pay income tax and National Insurance contributions.
All revenue (trading) expenses must have been incurred “wholly and exclusively” for the purposes of running the business to be allowable for tax purposes. This means that the costs must be incurred while actually performing the business or trying to attract more business. There are special rules for pre-trade expenses.
A capital expense is usually a larger item of expenditure incurred to purchase an asset that you would expect to use in the business for a reasonable period of time and which you would expect to have an enduring benefit for the business. There is no fixed time set out in law, but you would expect that asset to last for longer than a year, for example a computer or office shelving.
A revenue expense is something that lasts for a shorter period of time and is often used up by your actions. For example, ink cartridges for your printer or stock that you sell are two examples of revenue expenses. Most day-to-day expenses will be revenue expenses.
Unfortunatel not as some expenses are NOT allowable for tax purposes. These may be called disallowable expenses or expenses to be added back. As well as this, there may be some expenses in your accounts that are partly for business purposes and partly for personal purposes. No expenses for personal purposes are allowable.
To exclude the expenses that are not allowable you might need to make some adjustments to the profit shown in your accounts. See How do I work out my taxable profits? for more information.
HM Revenue & Customs' (HMRC) helpsheet HS222 How to calculate your taxable profits contains a useful table of the most common allowable and disallowable expenses.
We provide some additional information on the page Further comments on business expenses.
You will generally need to tell HMRC about your allowable expenses when you complete your tax return. Whether you have to tell them just your total expenses or list your actual expenses depends on your turnover (sales) and other circumstances.
You can use the short version of the self-employment pages of the tax return (SA103S) if your turnover is under the threshold of £85,000 (for 2019/20) and provided certain other circumstances do not apply. Have a look at the notes relating to these pages on GOV.UK for the full list. Otherwise you will need to complete the GOV.UK for the full list. Otherwise you will need to complete the self-employment full version supplementary pages SA103F.
You need only enter the total figure of your business expenses in the self-employment short version Supplementary Pages SA103S. However, make sure you keep details of the expenses you claim in case HMRC make enquiries into your tax return.
If your annual turnover in your business is less than £85,000 (for 2019/20), but because of your circumstances you still have to complete the full self-employment pages, you need only enter the total figure of your business expenses. However, make sure you keep details of the expenses you claim in case HMRC make enquiries into your tax return.
If your annual turnover is more than £85,000 (for 2019/20) you will need to show your actual expenses, grouped within specific categories, in the self-employment (full) pages.
Looking at SEF2 of the self-employed pages for 2019/20 you can see that there are two columns for each expense – the left-hand column is where you will include the total expenses or costs and the right-hand column is for any amounts that are not allowed but are included in the total in the left-hand column.
The disallowable expenses should be totalled.
There is useful commentary on which expenses are allowable and which are disallowable on pages five and seven of the Self Assessment self-employed pages notes for 2019/20.
More information is available on the page Further comments on business expenses.
What are simplified expenses?
There are three types of expenses where you can claim a flat rate allowance for the expense rather than the actual cost or an apportionment of the total cost (when there is both business and private usage). These flat rate allowances are called simplified expenses and were designed to make it easier for the self-employed or partnerships (where all the partners are individuals) to keep business records and prepare their tax returns.
However, it may not always be preferable to claim the simplified expenses as you may be able to claim a greater amount by using the actual cost although it may be more complicated and/or time-consuming to calculate the actual business expense.
The three types of simplified expenses are for:
- Working from home (the simplified expense is explained later on this page and the actual cost/apportionment approach is explained below)
- Living in your business premises, for example if you run a guest house and live on-site
- Business mileage costs
We look at both methods of calculating the allowable business expense for these below.
You can claim a proportion of your household expenses such as heat and light, council tax, water rates, rent or mortgage interest and certain repairs when you work from home. So, if your house has four rooms, excluding the kitchen and bathroom, and you use one room partly for business purposes, you may be able to claim up to one quarter of those costs.
There are several examples of how home-running costs may be apportioned on a reasonable basis in HMRC's Business Income Manual.
If you own the house you are working from, you need to be aware of a specific tax rule. Normally when you sell your home, there is no tax to pay on any profit that arises. If you have used any part of your house exclusively for business purposes, then a proportion of any profit would become liable to tax. Usually, rooms are not used exclusively for business purposes so this may not be an issue. It does mean, though, that you may need to be careful to restrict the claims for household expenses you make.
Yes, there is. You can use one of the simplified expenses which allow you to claim household expenses using flat rate allowances to save you time in calculating the business proportion of these costs. You can only claim flat rate expenses for working from home if you work there for at least 25 hours per month.
|Hours of business use per month||2019/20 and 2020/21 flat rate per month|
|25 to 50||£10*|
|51 to 100||£18*|
|101 and more||£26*|
* This is instead of actual expenses, for example the business proportion of utilities. In addition to this you can still claim a business proportion of household expenses for example for council tax, mortgage interest costs and the internet.
These flat rate allowances are relatively modest amounts and so may result in a smaller claim than if you claim an appropriate proportion of your actual costs, but they are simpler to calculate and would not be subject to scrutiny by HMRC in the event of an enquiry provided they have been calculated correctly.
What if I live on my business premises: how do I calculate my home expenses?
If you live on your business premises, for example your business is running 'Bed and Breakfast' accommodation, you can use the flat rate adjustment to calculate your personal expenditure (for example, utility costs and food). This flat rate allowance is then deducted from the businesses’ actual costs so that only the business cost is included on your Self Assessment tax return. The flat rate does not include costs such as rent, mortgage interest, council tax and business rates; these will have to be adjusted for on your Self Assessment tax return in addition to the fixed rate adjustment.
The fixed rate adjustment is based on the number of occupants at the business dwelling:
- 1 occupant £350 per month
- 2 occupants £500 per month
- 3 or more occupants £650 per month
Similarly to home expenses, you can either claim a proportion of your actual motoring expenses or you can charge flat rate expenses as follows:
|Vehicle||2019/20 and 2020/21
Amount per business mile with simplified expenses
|What you can claim if you do not or cannot use simplified expenses|
|Using the accruals basis||Using the cash basis|
|Cars and goods vehicles
first 10,000 miles
|45p||Capital allowances and running costs (for cars) or purchase costs (goods vehicles)||Capital allowances and running costs (for cars) or purchase costs (for goods vehicles)|
|Cars and goods vehicles
after 10,000 miles
|25p||Capital allowances and running costs (for cars) or purchase costs (goods vehicles)||Capital allowances and running costs (for cars) or purchase costs (for goods vehicles)|
|Motorcycles||24p||Full purchase cost and running costs||Full purchase cost and running costs|
|Bicycles||20p||Full purchase cost and running costs||Full purchase cost and running costs|
If you use the flat rate expense rules you will need to keep a record of the number of miles you travel for business but you will not need to keep track of your vehicle running and repair costs.
You can still claim all other travel expenses (for example train journeys and car parking) in the usual way.
You do not have to use flat rate expense for all your vehicles. However, once you have chosen to use them for a specific vehicle you must stick with this approach for as long as you use that vehicle for your business.
If you have already claimed capital allowances for a vehicle you cannot use the mileage rate for it.
Where can I find 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 examples of accounts using the simplified expense rules and a case study showing how to prepare accounts using the simplified expenses for working at home and motor expenses.
There is a simplified expenses checker on GOV.UK which is a guide as to whether you will be better off using a flat rate allowance compared to apportioning expenses. Be careful – these checkers are only a guide and accurate information must be used in order to get a reliable result.
There is more information on the simplified expenses on HMRC’s Business Income Manual.
There is more information on what expenses you can claim when running a business from your home if you decide not to use the simplified expenses flat rate allowance in HMRC’s Business Income Manual.
HMRC have produced a series of short films on business expenses, showing HMRC’s view of expense rules:
If you are taking on staff, then there is information on our specialist website for employers (Please note that although this website is aimed at a specific group of employers – those that take on personal assistants to provide them with care and support – the guidance on the website is relevant to employers much more widely). The website covers employment law, setting up a payroll, paying wages, the National Minimum Wage and pension auto-enrolment.
|◀ How to prepare your accounts|