If you’re running a business, you’ll inevitably cover various business-related expenses from time to time. As the saying goes, you have to spend money to make money! Come tax time, it’s handy to know which of these you can claim as allowable business expenses on your return. So, what counts as a business expense?
What Are Business Expenses?
Business expenses are costs you incur as a direct result of running your business. As self-employed freelancers, it’s important to understand business expenses as they’re tax-deductible and reduce your overall tax liability.
Let’s say your annual revenue is £35,000 and you calculate your allowable business expenses to be £3,000. HMRC will then calculate your tax on £32,000 (revenue minus expenses), rather than £35,000. This means you “save” money as a result. While you don’t end up with more money in your pocket come tax time, you have made use of more of your money than you would if you didn’t have any business expenses. Be sure to check out our article all about paying taxes as a sole trader if you’re thinking about becoming self-employed on the solo scale.
With that in mind, let’s take a closer look at what counts as a business expense, before then going through some examples of things that don’t count as business expenses.
What Counts as a Business Expense?
When it comes to tax time, you can only claim “allowable” expenses which are reasonable, not excessive, and relevant to your business. We’ve set out the different categories of allowable business expenses below, along with some examples of each.
Office Supplies & Equipment
- Phone and internet bills
- Computer software (if you use it for less than two years or regularly renew its subscription)
- Utility bills
- Property insurance
- Accommodation for business-related travel
- Meals for overnight business trips
- Repairs and servicing
- Roadside assistance
- Parking & tolls
- Mileage (capped)
- Taxi, bus, train, and plane fares
- The cost of buying a bicycle and maintenance costs
- Website costs e.g. creating and hosting
- Business website domain and setting up a business email address
- Paid advertising placement e.g. online, in a newspaper or in a business directory
- Insurance for business premises
- Professional indemnity insurance
- Public liability insurance
Financial & Legal Costs
- Accounting fees
- Legal fees
- Bank fees or credit card charges (for accounts in the business’ name)
- Interest on business and bank loans
Professional Subscriptions & Training
- Member fees of any professional organisation you must register with (as recognised by HMRC)
- Annual subscriptions to trade or professional journals
- Training courses that directly relate to what your business does (if you’re retraining in a different field, you can’t claim the course as a business expense)
- Pensions & benefits
- Employer’s National Insurance
While there are a lot of items you can claim as allowable business expenses, there are also several you can’t.
What Doesn’t Count as a Business Expense?
You can’t claim any of the following as a business expense:
- The cost of traveling between home and your place of work (although some businesses will cover these expenses for their employees)
- Entertaining clients
- Buying business premises (you may be able to deduct leasing costs)
- Gym memberships
- Charitable donations
- Childcare costs (other tax relief is available)
- Pension payments (other tax relief is available)
- Parking fines for a business vehicle
It can be hard to know exactly what you can and can’t claim when filing your tax return, especially when some items on the above list look closely related to allowable expenses. If you’re unsure, it’s a good idea to contact the HMRC Self-Assessment helpline to confirm whether or not something is an allowable expense. But how do business expenses work if you work from home?
Working From Home – What Counts as a Business Expense?
If you’re a self-employed freelancer working from home, you use your house and services, such as the internet, for both personal and professional reasons. So, how do you calculate business expenses in that case? You’ll need to work out what proportion of these services you use for business purposes.
Freelancers working from home can claim a proportion of the following costs, in addition to any purely business-related expenses:
- Rent or mortgage interest
- Utility bills including electricity and heating
- Telephone line rental
- Household insurance
- Household repairs (except those that only relate to a part of the house you don’t use for the business)
Let’s look at some examples. If your home broadband costs £25 a month and you calculate that you use it for business purposes 40% of the time, you can claim £10 a month (40% of £25) as a business expense. If your electricity bill is £300 a year and you have three rooms in your flat, one of which you use exclusively as an office, you can claim £100 a year in electricity as a business expense (£300 divided by 3).
Rather than doing complex calculations each year, you might be able to use simplified expenses to claim business-related costs while working from home.
If you’re a sole trader or in a partnership and working from home at least 25 hours a week, you can use simplified expenses rather than having to work out the actual cost. Simplified expenses use a flat rate to calculate the allowance for mixed personal and business expenses. You can only use simplified expenses to calculate the costs of:
- Working from home, including rent, utility bills, council tax, and other similar costs (not including phone and internet)
- Living in your business premises e.g. a bed and breakfast
- A vehicle
The current simplified expenses amounts you can claim towards the costs of working from home are:
Hours of Business Use/Month
It’s worth checking whether using simplified expenses is the best approach for your circumstances. Even though it saves you time (and therefore money) when it comes to preparing your tax return, you might save more money in the long run by working out your actual costs.
How Do Business Expenses Work?
When you do your Self-Assessment tax return, there is a section where you can add information about your business expenses. HMRC will ask you to either simply add your total expenses or an itemised list, depending on your circumstances.
Even if you’re using simplified expenses, you must keep records of all your business expenses for six years, in case HMRC requests to see them. This includes receipts, statements, invoices, mileage, etc. An easy way to manage your business expenses is to set up a basic Excel spreadsheet tracking your expenses with a folder of supporting documents, such as receipts.
When it comes to anything tax-related, it’s a good idea to get professional advice relevant to your circumstances. For freelancers who work from home, business expenses can be complicated. But it’s important to be as informed as possible about what you can and can’t claim so you can minimise your overall tax liability.