Skip to main content
Tax Confident

Managing business expenses and what ‘claiming’ means

 

When running a business, there are usually costs you have to pay for, whether you’re a sole trader, in a partnership or run a limited company. These are called ‘running costs’ or ‘expenses’.

It’s important to understand how to deal with expenses for your specific business set-up, so you can be confident you’re claiming what you’re entitled to and don’t end up paying too much or too little tax.

We’ll explain what counts as an expense, how to manage them when you do your tax return, and what the phrase ‘claiming expenses’ actually means.

Let’s get into it.

Why do expenses matter for tax?

‘Turnover’ is the money your business makes, before you pay any expenses or tax.

When you run a business, you’ll pay tax on your profit. Some expenses can be taken off (deducted) from your turnover, to work out your taxable profit.

Key thing to remember:

You deduct your expenses from your business’ turnover to work out your taxable profit. We then use this taxable profit to work out how much tax you or your business pay.

What expenses are allowed to be deducted?

As we explained earlier, the costs you pay to keep your business running are called expenses.

Not all expenses can be deducted from your turnover to work out your taxable profit. Only the ones which are ‘allowable’.

Key thing to remember:

It’s important to know what counts as an allowable expense. If you claim for something that isn’t allowed, it can mean that you haven’t paid enough tax, and you may be charged later.

Allowable expenses are costs that only relate to your business. These may include things like:

  • stock and raw material
  • business travel, like fuel or train fares
  • office stationery
  • business utility bills
  • insurance
  • marketing and business websites

It’s understandable to assume that a cost counts as an allowable expense because you paid for it while working, or because your software didn’t flag an issue with it. But you can’t claim for all your costs.

You can’t claim for expenses like: 

  • fines or penalty charges
  • entertaining clients
  • travel between home and your usual workplace

Helpful tip: 

These are just a few examples of what you can and can’t claim for. If you’re a sole trader or in a business partnership, you can find more detail on which expenses are allowable on GOV.UK. And if you’re a limited company, you can find more examples of allowable expenses on GOV.UK too.

Using something for business and personal reasons

You may buy and use something for both business and personal reasons, such as a mobile phone. Only the business part is an allowable expense.

Key thing to remember:

To claim it as an allowable expense, you’ll need to work out the business’ share. That means working out how much you use that item or service for work, and how much for your personal life.

If you use something:

  • only for work, you can claim the full cost as an allowable expense
  • partly for business and partly for personal reasons, you can usually claim part of the cost as an allowable expense
  • mainly or only for personal reasons, you usually can’t claim it as an allowable expense

Helpful tip: 

The rules are a bit more complex if you run a limited company. You might want to speak with a tax agent or accountant to help you get it right.

There’s no single right way to work out your business’ share of a cost, but you should be able to explain how you’ve worked it out. You can find out more about claiming expenses for business reasons on GOV.UK.

Here’s an example.

Mark is a sole trader and uses one small room at home as his office.

He only uses this room for work purposes, it makes up 5% of the total floor area of his house.

Mark’s Council Tax, insurance and mortgage interest bills are £4,500.

Mark claims 5% of these bills as an allowable expense, which is £225.

Mark’s electricity bill for heating and lighting is £300.

He claims 5% of this bill too, which is £15.

Mark’s total claim for these allowable expenses is £240.

Helpful tip: 

Try to keep your business and personal spending separate whenever you can. The more the two mix, the more working out you’ll have to do later.

How you report expenses

As we’ve already mentioned, you’re entitled to claim for allowable expenses whether you’re a sole trader, in a business partnership, or run a limited company.

Your business set-up will determine what type of tax return you send us.

If you’re a sole trader:

  • you’ll claim your allowable expenses on your Self Assessment tax return
  • or through Making Tax Digital for Income Tax

If you run a limited company:

  • you’ll work out your taxable profit and tell us in your Company Tax Return

If your business is registered for Value Added Tax (VAT):

If you’re in a business partnership:

Here’s an example.

Ella is a sole trader and runs her own graphic design business.

Her turnover is £40,000 this year.

Ella spends £10,000 on allowable expenses like stationery, printing materials and marketing.

Ella deducts these £10,000 of expenses from her £40,000 turnover on her Self Assessment tax return.

This leaves Ella with £30,000 of taxable profit.

At HMRC, we’ll deduct any tax-free allowances from this £30,000 to work out how much Income Tax Ella owes.

Key thing to remember:

It may sound confusing, but ‘claiming’ expenses doesn’t mean you get money back. When you run a business, it actually means taking your allowable expenses off your business’ turnover to work out the taxable profit. You do this calculation when you send us your tax return.

Good record-keeping is essential

You must keep good records so you can show us what you bought, why you needed it, and how you worked out the amount on your tax return. You don’t need to send in your records and proof when you send us your tax return, only if we ask to see them.

You should keep:

  • receipts and invoices
  • bills
  • bank statements
  • mileage records

You can learn more about which records to keep on GOV.UK.

Helpful tip: 

Keeping good records makes managing expenses much easier. It means you can claim for all the costs you’re entitled to, so you’re not paying too much tax. Check out our tips on our Record-keeping for small businesses page.

If you think you’ve made a mistake

Hopefully you’re feeling more confident about how to work out your expenses on your next tax return.

Helpful tip: 

If you think you’ve made a mistake on a previous tax return, you may still be able to correct it, or you can get in touch with us to help you get it sorted.

If you sent us a Self Assessment tax return, you can usually correct it yourself on GOV.UK or get in touch to let us know the mistake on GOV.UK.

If you sent us a Company Tax Return, you can usually correct it on GOV.UK. Get in touch with us on GOV.UK or talk to your accountant or tax agent, if you have one.

And if you think you made a mistake on your VAT return, you can find out how to tell us on GOV.UK.

5 key things to remember

An expense is a cost of running your business.

Claiming means deducting that cost from your turnover to work out your taxable profit, not getting a refund.

You can’t claim for everything you buy for your business, only allowable expenses.

You must keep good records.

If you use something for business and personal reasons, you can only claim the business part.

We know expenses can feel like a lot to keep track of, but managing them is a key part of running your own business. Once you get the hang of it, it’ll become a habit and you’ll feel confident every time you do your tax return.

You can also use an accountant or tax agent to help with your tax returns. Many businesses find this very useful.

You can find more information about different types of allowable expenses on GOV.UK:

You can also watch our short videos:

In this section