What Are Tax Allowable Expenses?

The expenses incurred in running a business will vary according to its nature. HMRC rules allow deduction of expenditure from business income only where it is ‘wholly and exclusively’ incurred for the business. Understanding allowable expenses is an important part of effective financial planning for directors, as it directly impacts taxable profits and cash flow.

It must be possible to show that the expense was incurred solely for the benefit of the business. The expense must be justified primarily in business terms, and any items purchased must be used in the business.

Not all expenses included in business accounts are allowable for tax purposes. However, it remains important to include them in the accounts so that the commercial rationale for expenditure is clearly demonstrated, supporting accurate reporting and informed financial planning.

Which types of expenses are allowable?

The following types of expenses are allowable for tax purposes:

• Costs of purchases subsequently sold or consumed by the business, with adjustments for stock

• Direct costs of doing the work, commissions, carriage, contract costs and tools

• Employees and subcontractors, employers’ National Insurance Contributions (NICs), recruitment, training and benefits provided

• Premises, rates, energy, property insurance, security, rents and use of the home

• Repairs and renewals, maintenance of business premises and equipment

• General administration, telecoms, office expenses, professional subscriptions, insurance and consumable office supplies

• Vehicle expenses, hire and lease costs, parking and mileage allowances

• Travel, subsistence, taxis, accommodation, rail and air fares

• Advertising and promotion, free samples, business entertainment and hospitality

• Professional fees, accountancy, solicitors and professional indemnity insurance

• Bad debts written off as unrecoverable and previously included in turnover

• Interest and alternative finance payments on loans and overdrafts

• Finance charges, bank charges, credit charges, hire-purchase interest and leasing costs

Which types of expense are not allowable?

Expenses that are not allowable for tax purposes include payments made through the business for items that are not wholly and exclusively for business use, such as:

• Non-business use of assets

• Non-business work paid for by the business

• Depreciation (capital allowances are claimed instead)

• Costs of running non-business areas of premises

• Alteration, replacement or improvement of capital assets (added to acquisition costs instead)

• Political or charitable donations (although these may be allowable in profitable companies)

• Non-business motoring costs

• Fines and penalties

• Entertainment expenses

• Tax investigation costs unless no additional tax is charged

• Professional costs for purchasing fixed assets

• Repayments of capital in a finance agreement

• Ordinary, everyday clothing

What can be claimed when running a business from home?

Extra domestic costs incurred as a result of running a business from home may be tax allowable. HMRC will accept a reasonable calculation of these expenses, provided it can be demonstrated how the figure has been arrived at. This is particularly relevant for directors operating from home as part of their wider financial planning.

Based on area, usage, or time the home is used for business purposes, a proportion of general household costs may be claimed. Where there is a dedicated office, workshop, or studio, this may equate to, for example, one-fifth of the following expenses:

• Heating, lighting and water.

• Council tax, insurance and mortgage interest

• Cleaning and decorating

What is allowable under employee expenses?

Allowable employee-related expenses may include:

• Salaries and wages

• Bonuses

• Benefits in kind, such as cars, fuel and medical insurance

• Pension contributions

• Key worker insurance (subject to policy terms and professional advice)

• Temporary and casual staff

• Employers’ NICs

• Canteen and working lunches

• Recruitment and training

• Annual parties, incentives and awards (within limits)

• Locum fees

• Travel and subsistence expenses

What happens if a business claims expenses that are not allowable?

It is important to review receipts and records throughout the year to avoid including non-allowable expenses. If HMRC opens an enquiry into a sole trader’s or partnership’s tax return, claims will need to be supported with appropriate documentation and explanations.

Professional accountants can assist directors by assessing eligible expenses and ensuring compliance, forming a key part of ongoing financial planning for directors and reducing the risk of costly errors.