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 purposes of the business.  

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 terms of business reasons and any items purchased must be used in the business. 

Not all the expenses included in business accounts are allowable for tax purposes. But it is still important to include them, so that the commercial justification for purchases can be demonstrated.

Which types of expense are allowable?

The following types of expense 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, 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, amounts written off as unrecoverable and previously included in the turnover.

• Interest, 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 are payments made through the business or allowances for items that are not solely and exclusively for business use. These include:

• Non-business use of assets.

• Non-business work paid for by the business.

• Depreciation (capital allowances are given instead).

• Costs of running non-business areas of the premises.

• Alteration, replacement or improvements to capital assets (these are added to acquisition costs).

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

• Non-business motoring costs.

• Fines and penalties.

• Entertainment expenses.

• Tax investigation costs unless no tax is added to the business's liability.

• Professional costs for purchase of fixed assets (these are capital acquisition costs).

• 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 are tax allowable.

HMRC will accept a reasonable calculation of these expenses provided it can be shown how the figure was arrived at in the accounts.

Based on the area, usage, or time a home is actually available to a business, a proportion of the general and establishment costs can be worked out. Where there is a separate office, workshop or studio, this may form, for example, one in five of the rooms in the home and so one-fifth of the following expenses would be allowable:

• Heating, lighting and water.

• Council tax, insurance and mortgage interest

• Cleaning and decorating

What is allowable under employee expenses?

Expenses allocated to employees can include:

• Salaries and wages.

• Bonuses.

• 'Benefits in kind', such as cars, fuel, medical insurance etc

• Pension provisions.

• Key worker insurance: premiums paid for key worker policies may be allowable, but this is not guaranteed, depending on the terms of the policy, and therefore professional advice should be sought. A common use of key worker policies is to provide cover for a director who is a major shareholder, but not for other employees; in this case, the premiums would be likely to be disallowed.

• Temporary and casual staff.

• Employers' NICs.

• Canteen and working lunches.

• Recruitment and training.

• Annual parties, incentives and awards (up to certain limits).

• Locum fees.

• Travel and subsistence expenses.

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

It is important to check receipts while bookkeeping during the year to avoid inadvertent inclusion of items that are not business expenses. 

If there is an enquiry about a sole trader's or partnership tax return, HMRC may start an investigation into the accounts, and any claims made will need to be backed up with documentation and explanations.

Accountants can support with assessing eligible expenses as part of financial preparations throughout the year.