What is a legitimate business expense?

If you already think you pay too much tax as a sole trader or landlord, you would probably pay significantly more if you were not allowed to claim for a wide range of legitimate business expenses via your Self Assessment tax return.

What can I legitimately claim for on my tax return?

• According to HMRC rules, an expense can only be legitimate for tax purposes if it’s “incurred wholly and exclusively for the purposes of the trade, profession or vocation”.
• If it’s created for non-trade (ie personal) purposes, obviously, it isn’t a legitimate business expense.
• Where an expense was created for dual-purpose (ie business and personal reasons), you may be able to claim for the business proportion of cost.

What are “allowable expenses”?

Allowable expenses are costs you pay when running your self employed business or renting out your property that HMRC allows you to deduct from your income. They help to reduce your tax bill.

You claim for allowable expenses by summarising them within your Self Assessment tax return. They are deducted from your taxable income, in addition to any other claimable allowances and reliefs, and HMRC will then tell you how much Income Tax you owe.

Many expenses are not allowable for tax purposes, for example, entertaining customers, travel costs to and from your normal place of work, parking and speeding fines, a business suit, daily lunches, etc.

Need to know! You cannot claim allowable expenses if you use your £1,000 tax-free trading or property allowance, which can be worth claiming if your expenses are below that amount.

• Read: 45 allowable expenses you can claim when you’re a sole trader.
• Also read: What expenses can landlords claim against tax?

What if you work from home some or all of the time?

If you work from home or you have a home office from which you run your sole trader business, you may be able to claim a proportion of your bills for heating, electricity, Council Tax, mortgage interest or rent, broadband, telephone, etc. You’ll need a reliable method of working out cost proportion. People normally base this on how many rooms they have in their house/flat and how much time they spend working in their home office, studio or other space.

Instead of working out the proportion of actual costs, if you work for 25 hours or more a month from home you can claim a flat rate: £10 a month for 25-50 hours a month; £18 a month for 51-100 hours a month; and £26 a month for 101 hours or more. You can claim for telephone and broadband costs on top of this.

Similarly, under HMRC’s simplified expenses rules, you can claim actual business motoring costs or a simplified flat rate (45p a mile for the first 10,000 miles, 25p a mile thereafter for cars and good vehicles; 24p a mile for motorcycles; and 20p a mile for bicycles). As previously stated, you cannot claim for journeys between your home and normal place of work – commuting costs aren’t an allowable expense.  

When to claim capital allowances

If you use traditional accounting, where you record your income and expenses by the date you invoiced or were billed, you claim capital allowances when you buy something you keep to use in your business, such as equipment, machinery and business vehicles.

What if I’m not sure if an expense is allowable?

• There are many websites that detail allowable and disallowable expenses, but you need to be sure that the information is reliable (which it is on ours, of course).
• Alternatively (and for definitive guidance), HMRC recommends that you contact the Self Assessment helpline if you’re not sure whether a business cost is an allowable expense or not.

What expenses records must I keep?

You should keep detailed records of all your business expenses as proof of your costs. If you use accounting software, make time, at least once a month, to enter all of your expenses, because the task then remains more manageable.

You don’t have to send in proof of the expenses you claim when you submit your Self Assessment tax return, but you should keep proof, especially for cash purchases, because HMRC might later ask to see receipts, invoices and your accounting records.

What if I claim for an expense that isn’t allowable?

Tax returns can be amended within 12 months of the filing deadline (31 January if you file online). So, if you later find out that you’ve claimed for disallowable expenses or have claimed too much or not enough allowable expenses, correct your tax return ASAP.  

After that, if there’s an inaccuracy in your tax return, obviously, you’ll have to pay any additional tax due, but other penalties can also be charged.

• If the tax return inaccuracy resulted from a lack of reasonable care on your part, the penalty will be between 0% and 30% of the extra tax due.
• If the error was deliberate, the penalty will be between 20% and 70% of the extra tax due.
• If the error is deliberate and you tried to conceal it, the penalty will be between 30 and 100% of the extra tax due.
• In all cases, the penalty will be lower if you tell HMRC about the error and work with HMRC to enter the correct data so that the correct amount of tax owing can be worked out.

You’re better advised to find out exactly what expenses you can claim and make sure that you don’t make any mistakes when completing your Self Assessment tax return.

GoSimpleTax is award-winning software that offers you an easier way to complete and file your Self Assessment tax return. And to ensure that your tax return is error-free and that you’re claiming all of your allowable expenses, why not get your Self Assessment tax return checked by one of our experts?

Blog content is for information purposes and over time may become outdated, although we do strive to keep it current. It's written to help you understand your Tax's and is not to be relied upon as professional accounting, tax and legal advice due to differences in everyone's circumstances. For additional help please contact our support team or HMRC.